Findings Of Fact By Stipulated Settlement and Mutual Release executed December 22, 1988, (Ex. 1) signed by Mike Gresham, Director, Division of Administration, Department of Insurance and John Machules, the parties agreed to settle all issues and conclude the litigation and all claims in this case. The Deputy Commissioner approved the agreement on December 28, 1988, making it final with respect to both parties. In consideration of the Department agreeing to pay Machules the salary he would have earned plus compensation for the leave he would have earned between February 1, 1935 and December 31, 1988, in the gross amount of $76,713.33, Machules agreed to: Waive any and all present or future claims against the Department concerning the abandonment action; Waive the right to hearing in this matter and to dismiss with prejudice the case currently pending before the Division of Administrative Hearings; Voluntarily tender his resignation from employment with the Department effective at 5:00 p.m. on December 31, 1988; and Release the Department from all acts or omissions alleged or which could have been alleged in this cause of action or any derivative or collateral action at law or in equity. On December 22, 1988, Machules tendered his resignation effective 5:00 pm. December 31, 1988, (Ex. 1). On December 22, 1988, Machules, in consideration of the sum of $76,71.33 minus standard deductions (Ex. 1) executed a RELEASE releasing the Department from all claims arising from the termination of his employment with the Department. By letter dated December 9, 1988, (Ex. 2) Machules was advised by the Department that all details of the settlement had to be accepted and approved prior to the end of December 1988, that the Department could not credit him with an additional year of credible service (to qualify Machules for retirement) and if this was a condition he insisted upon, the case would proceed to hearing. By letter dated January 4, 1989, (Ex. 3) from the Department to Petitioner's then acting attorney, Machules was advised that the Comptroller's office needed a new W-4 form from Machules and affidavit of his earnings during the period the Department had agreed to pay him. By letter dated February 1, 1989, (Ex. 4) from the Department to Petitioner's attorney, Machules was advised of an IRS levy on Machules' salary and requested documentation that the delinquent taxes had been paid. By letter dated February 27, 1989, (Ex. 4) from the Department to Petitioner's attorney, the attorney was advised that Machules had telephoned the Department lawyer regarding the IRS lien and that he had advised Machules that his attorney should make the contact and further advised Machules that the information on this lien could be obtained from the Comptroller's office. The attorney was also advised that Machules had requested subpoenas for the earlier scheduled March 1, 1989, hearing. By letter dated March 17, 1989, (Ex. 5) the Comptroller's office advised the Department that all issues in the Machules' back pay award had been resolved except for Machules' interim earnings during the back pay period. By letter dated March 21, 1989, (Ex. 6) the Department forwarded a copy of the Comptroller's letter (Ex. 5) to Machules' attorney requesting income tax returns for the years 1986, 1987 and 1988 or W-2 forms for those years, either of which would be acceptable to the Comptroller. By letter dated March 31, 1989, (Ex. 8) the Department forwarded to Machules' attorney a copy of a letter and affidavits received by the Comptroller's office from Machules and advised the attorney that more specific information was required by the Comptroller before Machules' claim could be paid. By letter dated April 3, 1989, (Ex. 9) Machules wrote to Respondent's attorney acknowledging receipt of a copy of Exhibit 8 and stating, among other things, that since he had not received the $76,000.00 by December 31, 1988, "The tentative settlement agreement was NULL and VOID." However, he included a list of one place "employed from 1971 to present" and part-time employment at other places in 1987 and 1988. No specific earnings were provided. By letter dated April 12, 1989, (Ex. 10) the Department replied to Exhibit 9 emphasizing to Machules that it was the Comptroller that needed to be satisfied about Machules' interim earnings before it could pay his claim and he would not be paid until he satisfied the Comptroller on this point. By letter dated April 13, 1989, (Ex. 11) Machules forwarded to the Department copies of 1099-MISC and W-2's for 1987 and 1988. Receipt of this letter which provided the information previously requested was acknowledged by Respondent on April 18, 1989 (Ex. 12). By letter dated April 20, 1989, (Ex. 13) the Department forwarded to Machules' attorney a warrant dated 4/19/89 in the amount of $50,572.33 payable to John J. Machules with a Retroactive Payment Schedule showing a deduction for interim earnings, withholding tax and social security tax. By separate letter dated April 20, 1989, (Ex. 14) the Department advised Machules that the check settling his claim for back pay had been forwarded to Machules' attorney. By letter dated May 11, 1989, (Ex. 15) to Machules' attorney, the Department inquired if Machules had received payment so this case could be closed. By letter dated May 9, 1989, (Ex. 17) Machules was advised by AFSCME that the check being held for him would be returned to the Department if he did not pick it up before May 22, 1989. By letter dated May 13, 1989 (Ex. 17) Machules requested AFSCME to forward the check to him. This was done on May 25, 1989, (Ex. 17). On June 1, 1989, (Ex. 17) Machules acknowledged receipt of the check "as part payment for a future settlement." By letter dated June 23, 1989, (Ex. 16) AFSCME legal counsel advised that the union would not provide legal counsel at an abandonment hearing but would provide a representative to assist him at such a hearing. On the witness stand Petitioner acknowledged signing the settlement agreement and his letter of resignation from the Department; and that he received and cashed a check in the amount of $50,572.33. He also received an accounting of all deductions from the $76,717.33 noted in the stipulated settlement. Petitioner contends that because he didn't receive $76,717.33 in December 1988 the settlement stipulation became void as well as did his resignation. He could point to no line of either document indicating the stipulated settlement was void or voidable if all conditions were not met by December 31, 1988. In fact, Petitioner testified that he really didn't expect to get the check until January 1989, at the earliest. Delays in cutting the warrant and paying Petitioner the funds due under the settlement was due to Petitioner's failure to promptly provide proof to the Comptroller of his other earnings between February 1985 and December 1988. Respondent has fully complied with the terms of the settlement stipulation.
Recommendation It is recommended that all claims of John J. Machules resulting from the charges of abandonment of position in February, 1985, be dismissed. ENTERED this 19th day of July, 1989, in Tallahassee, Leon County, Florida. K. N. AYERS Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 19th day of July, 1989. COPIES FURNISHED: John Zajac AFSCME 1703 Tampa Street, Suite 1 Tampa, Florida 33602 John Hale, Esquire 200 East Gaines Street 4l3-B Larson Building Tallahassee, Florida 32399-0300 Honorable Tom Gallagher State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Don Dowell, Esquire General Counsel Department of Insurance and Treasurer The Capitol, Plaza Level Tallahassee, Florida 32399-0300
The Issue The issue in this case is whether Respondent, James Robert Stiffler, knowingly made untrue statements of material facts to induce Frank Galasso to purchase two viatical settlement agreements. Essentially, the charges are that Respondent, in his solicitations and negotiations with Frank Galasso, stated that viatical settlement agreements were, "guaranteed," "no risk," "fully secured," "risk free," "non-speculative," and promised a "fixed rate of return;" and that Respondent provided viatical settlement agreement literature containing one or more the above the prohibited phrases, for the purpose of inducing Frank Galasso to purchase, and Frank Galasso did purchase, two viatical settlement agreements for money paid.
Findings Of Fact The background activities pertinent to the dates and occurrences between Respondent and Mr. Galasso are presented. Simultaneous activities by the Federal Bureau of Investigation (hereinafter FBI) investigating other companies, including principals of American Benefits Services, Inc. (hereinafter "ABS") involved in the sale of viatical agreement in Florida are summarized. FRANK GALASSO and RESPONDENT At an unspecified time in mid 1998, Frank Galasso, a retired licensed real estate and casualty insurance agent, had his first exposure to viatical purchases while watching "60 Minutes" on television. In October of 1998, Frank Galasso, in response to a newspaper advertisement, called Respondent's listed phone number and left a message expressing his interest in viatical and requested a return phone call. In a January 1999 return phone call to Mr. Galasso, Mr. Galasso advised Respondent that he was not quite ready and needed more time to consider the purchase. A subsequent follow-up phone call in April 1999, resulted in Respondent and Mr. Galasso discussing diversifying Mrs. Galasso's portfolio with the possibility of investing in a viatical settlement agreement purchase. In May of 1999, Respondent met with Mr. Galasso at Mr. Galasso's residence and explained the viatical purchase agreement "from start to finish." Respondent gave Mr. Galasso a package of literature and other information provided Respondent by ABS. After a two-and-one-half-hours of discussion Mr. Galasso purchased a $13,429.93 viatical agreement for Mrs. Galasso's Individual Retirement Account. A receipt of purchase and the agreement of purchase were given to Mr. Galasso. On June 11, 1999, Respondent met again with Mr. Galasso for discussion of and consummation of a second purchase of a viatical settlement agreement. Respondent assured Mr. Galasso that he would receive interest payments of 9.85 percent, per annum, paid monthly for 36 months and when the viator died, he, Mr. Galasso, would receive his principal investment of $25,000 back. Respondent further assured Mr. Galasso that after one year he could rescind the viatical purchase agreement, retain all interest paid, and get his principal back by sending a written request at least 30 days prior to the anniversary date of purchase. In June 1999, ABS informed Mr. Galasso that the State of Florida, Department of Banking and Finance, filed an administrative complaint alleging violations by ABS of the state's "Securities Act" and that a stipulation and consent to Final Order Agreement was entered, effective August 10, 1999. In July of 1999, Mr. Galasso, reading the Herald Tribune, became aware that ABS and Financial Federated were under investigation by the FBI. In August of 1999, Mr. Galasso made several written attempts to exercise his option to rescind his viatical purchase agreements without success. FBI AGENT, ANTHONY YANKETIS, and VIATICAL SALES ENTITIES Unknown to Respondent and Mr. Galasso, in May/June of 1998, Anthony Yanketis, FBI special agent of the economic crimes division, initiated an investigation regarding a viatical settlement as a result of information received from an investor in a viatical purchase agreement situation. In January 1999, the FBI confirmed that Ray Levy was the owner of ABS, a viatical settlement brokerage company that raised funds for the purchase of viatical settlements, that generated approximately six million ($6M) of investors funds each month. In June 1999, Jeffery Paine, Esquire, escrow agent for ABS, admitted that he merely rubber-stamped written representations from Financial Federated that insurance policies had been purchased and actual medical overviews conducted and released money held in escrow. In August 1999, FBI investigations revealed that approximately 90 percent of money obtained from investors were used for the purchase of personal benefits and the purchase of real estate; and that lulling letters were sent to insurance agents, attorneys, and viatical investors. FEDERAL GRAND JURY and VIATICAL SALES ENTITIES In September 2000, the Federal Grand Jury, Southern District of Florida, West Palm Beach Division, returned a True Bill Indictment. The indictment introductory allegation states: At all times relevant and material to this indictment: Viatical settlements are the purchase of life insurance policies or their benefits at a discounted rate from a terminally ill person. The beneficial interest in the insurance policies purchase is sold or reassigned to an investor. A viatical investor receives the full benefits when the ill person dies. Count 9. From at least as early February, 1996, Viatical Asset Management, Asset Base Management, and later ABS operated as viatical settlement brokerage companies engaged in the business of locating investors who would purchase interests in viatical settlements. ABS obtained investors' funds through a network of independent insurance agents and financial consultants. Count 10. In connection with its viatical settlement brokerage business ABS used one or more participation disclosure documents that described the viatical settlement program it was offering for sale to investors. OBJECT OF THE SCHEME AND ARTIFICE TO DEFRAUD The object of the scheme and artifice to defraud was that defendants, together with others known and unknown to the Grand Jury, would unlawfully enrich themselves by knowingly and willfully making false and fraudulent representations and promises, and . . . concealing material facts from prospective investors, inducing them to send personal checks, bank checks, wire transfers or money orders to Financial Federated, Viatical Asset Management, Asset Base Management, American Benefits Services, Inc, and the escrow agent. . . MANNER & MEANS OF EXECUTING THE SCHEME TO DEFRAUD "Under false and fraudulent pretenses defendants, FREDRICK C. BRANDAU, and MARY ANNE BILLINGHURST, together with other persons . . . participated in recruiting insurance agents to solicit investors in viaticated insurance policies . . ." (a) . . . investor funds obtained by American Benefits Services . . . would be used to purchase viaticated insurance benefits; (b). . . investors was guaranteed a 42% rate of return within 36 months on his or her investment if the insured party died. (a) While over $115 million in investors funds were transferred to Financial Federated for the primary purpose of purchasing insurance policies, less then $6 million was actually used to purchase policies . . . the vast majority of such monies was used to fun commissions for ABS and Financial Federated employees, and to purchase real and personal property around the United States that had nothing to do with viatical business. (f) the defendants knew that the irrevocable assignment of trust benefits was not a "guaranteed receivable from the insurance company." The defendants knew that 90% of the investors funds had been used to buy real and personal property, and not insurance policies. Accordingly, the defendants knew that the vast majority of the assigned "trust benefits" were worthless, and not a "guaranteed receivable" since most investors had no underlying insurance policy securing their investment. OVERT ACTS (t) In or about June 1998 . . . FREDRICK C. BRANDAU, and MARY ANN BILLINGHURST attended a meeting with numerous insurance agents for the purpose of promoting the activities of FINANCIAL FEDERATED. (Respondent's Exhibit "C") James Robert Stiffler, at all times pertinent and material hereto, was licensed in Florida as a life insurance agent, therefore authorized by Section 626.992(4), Florida Statutes, to perform the functions of a viatical settlement agent. At all times pertinent and material hereto, James Robert Stiffler, d/b/a/ "James Financial Inc.," worked for ABS through U.S. Investors Group and Seniors Financial Resources. At all times pertinent and material hereto, Rafael Levy, a/k/a Ray Levy, was the principal of ABS. Fred Brandau, convicted on 42 counts of fraud in United States District Court and awaiting sentencing, was the head of Financial Federated. ABS sales agents would procure investors to provide money to Financial Federated. Financial Federated provided the viaticals to ABS, which were in turn sold by Respondent to Frank Galasso. Respondent, in May of 1999, solicited and sold a viatical settlement agreement to Frank Galasso for Mrs. Galasso's IRA. During solicitation and sale Respondent represented and made untrue statements of material fact to Frank Galasso that the viatical were "secure," "had no risk," and "was safe." Respondent, in October 1998, gave to Frank Galasso literature provided by ABS containing statements and assertions, which were untrue, deceptive, and misleading. On June 11, 1999, Respondent solicited and sold a viatical settlement purchase agreement to Frank Galasso for $25,000. During the solicitation and sale Respondent represented and made the following untrue statements of material fact: (a) that Frank Galasso would receive his principal back when the viator died; (b) that if the viator did not die within 36 months, Frank Galasso would be able to get his principal back; (c) that before expiration of one year from the purchase date, Frank Galasso would be able to rescind the purchase agreement, retain monthly interest paid, and get full refund of his principal; (d) that the investment was safe, and had no risk and until the viatical had been purchased he could receive his money back; and (e) that the $25,000.00 purchase price would go to an attorney, in trust, to be used to purchase a viatical. Respondent, on two separate occasions during the sales of viatical purchases agreements, presented literature provided by ABS to Mr. Galasso containing written assertions, to wit: (a) an investment with a "fixed 42 percent return"; (b) "Guaranteed"; (c) "no risk investment"; and (d) the principal is "safe." Respondent's defense that Frank Galasso was an experienced investor and therefore could not be persuaded into an investment he did not want is without merit. Respondent's defense that Frank Galasso's reliance upon ABS printed literature absolved him from liability is without merit. Respondent's defense that Frank Galasso purchased two viatical agreements based upon the representations made in the disclosure documents provided by ABS and presented by Respondent to Mr. Galasso is without merit. Respondent's defense that his inquiries and phone calls to the Department of Insurance resulted in no negative information concerning ABS is without merit. Respondent's defense that once the Department of Insurance became aware of problems with the business practices of ABS it had a duty to communicate that information to licensed agents, such as Respondent, is without merit.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is recommended that the agency enter its final order finding Respondent, James Robert Stiffler, guilty of violations of Sections 626.611(1),(7) and (8); 626.99275(2)(b) and (c); 626.99277(6); 626.9541(1)(b); 626.99235(1), and 626.621.(2) and (6) Florida Statutes, and that Respondent, James Robert Stiffler's, license as an insurance agent in this State be suspended for a period of (91) days. DONE AND ENTERED this 8th day of November, 2000, in Tallahassee, Leon County, Florida. FRED L. BUCKINE Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 8th day of November, 2000.
Findings Of Fact The previously described Agency Statements allegedly defined as rules constitute efforts by Petitioner to paraphrase information found in the Administrative Complaint in Case No. 89790-07-AG. When contrasting the allegations within the petition at paragraphs 12.1. through 12.5., they are comparable to paragraphs within the Administrative Complaint which state: General Allegations * * * At all times material hereto, you, GEORGE MARSHALL SMITH, offered for sale and sold viatical settlement purchase agreements on behalf of Mutual Benefits Corporation ("MBC"). The viatical settlement purchase agreements you, GEORGE MARSHALL SMITH, offered for sale and sold on behalf of MBC were securities, as defined under section 517.021(20)(q), Florida Statutes (2003). The viatical settlement purchase agreements that you, GEORGE MARSHALL SMITH, offered for sale and sold on behalf of MBC were not registered with the State of Florida Department of Banking and Finance, as required by Section 517.07, Florida Statutes, and were not exempt from such registration requirements, either under the provisions of sections 517.051 or 517.61, Florida Statutes. You, GEORGE MARSHALL SMITH, were not registered in this state to sell securities, as required by Section 517.12, Florida Statutes. * * * 20. On or about September 17, 2002, you, GEORGE MARSHALL SMITH, sold D.M. and V.M. of The Villages, Florida, five viatical settlement purchase agreements issued by MBC. The total purchase price of the viatical settlement purchase agreements was over $70,000. * * * IT IS THEREFORE CHARGED that you, GEORGE MARSHALL SMITH, have violated or are accountable under the following provisions of the Florida Insurance Code and Rules of the Chief Financial Officer which constitute grounds for the suspension or revocation of your license(s) and eligibility for licensure: * * * Sale of an unregistered security that was required to be registered, pursuant to chapter 517. [Section 626.611(16), Florida Statutes (2003)]; * * * 31. On or about March 18 and April 7, 2003, you, GEORGE MARSHALL SMITH, sold G.A. and E.A. of Lady Lake, Florida, eight viatical settlement purchase agreements issued by MMBC. The total purchase price of the viatical settlement purchase agreements was at least nearly $88,000. * * * IT IS THEREFORE CHARGED that you, GEORGE MARSHALL SMITH, have violated or are accountable under the following provisions of the Florida Insurance Code and Rules of the Chief Financial Officer which constitute grounds for the suspension or revocation of your license(s) and eligibility for licensure: * * * (d) Sale of an unregistered security that was required to be registered, pursuant to Chapter 517. [Section 626.611(16), Florida Statutes (2003)]; * * * 42. On or about June 9 and September 9, 2003, you, GEORGE MARSHALL SMITH, sold D.C. and W.C. of the Villages, Florida, five viatical settlement purchase agreements issued by MBC. The total purchase price of the viatical settlement purchase agreements was $135,000. * * * IT IS THEREFORE CHARGED that you, GEORGE MARSHALL SMITH, have violated or are accountable under the following provisions of the Florida Insurance Code and Rules of the Chief Financial Officer which constitute grounds for the suspension or revocation of your license(s) and eligibility for licensure: * * * (d) Sale of an unregistered security that was required to be registered, pursuant to chapter 517. [Section 626.611(16), Florida Statutes (2003)]; Chapter 2005-237, Laws of Florida, effective July 1, 2005, added at Section 1., a definition within Section 517.021, Florida Statutes, as follows: 517.021 Definitions.--When used in this chapter, unless the context otherwise, indicates, the following terms have the following respective meanings: * * * (w) A viatical settlement investment. (23) "Viatical settlement investment" means an agreement for the purchase, sale, assignment, transfer, devise, or bequest of all or any portion of a legal or equitable interest in a viaticated policy as defined in chapter 626. The term does not include: The transfer or assignment of an interest in a previously viaticated policy from a natural person who transfers or assigns no more than one such interest in 1 calendar year. The provision of stop-less coverage to a viatical settlement provider, financing entity, or related provider trust, as those terms are defined in s. 626.9911, by an authorized or eligible insurer. The transfer or assignment of a viaticated policy from a licensed viatical settlement provider to another licensed viatical settlement provider, a related provider trust, a financing entity, or a special purpose entity, as those terms are defined in s. 626.9911, or to a contingency insurer provided that such transfer or assignment is not the direct or indirect promotion of any scheme or enterprise with the intent of violating or evading any provision of this chapter. The transfer or assignment of a viaticated policy to a bank, trust company, savings institution, insurance company, dealer, investment company as defined in the Investment Company Act of 1940, pension or profit-sharing trust, or qualified institutional buyer as defined in United States Securities and Exchange Commission Rule 144A, 17 C.F.R. 230.144A(a, or to an accredited investor as defined by Rule 501 of Regulation D of the Securities Act Rules, provided such transfer or assignment is not for the Securities Act Rules, provided such transfer or assignment is not for the direct or indirect promotion of any scheme or enterprise with the intent of violating or evading any provision of this chapter. The transfer or assignment of a viaticated policy by a conservator of a viatical settlement provider appointed by a court of competent jurisdiction who transfers or assigns ownership of viaticated policies pursuant to that court's order. 3. Chapter 2005-237, Laws of Florida at Sections 7., 8., 10., 11., and 14. state in pertinent part: Section 7. Subsection (10) of section 626.015, Florida Statutes, is amended to read: 626.015 Definitions.--As used in this part: (10) "Life agent" means an individual representing an insurer as to life insurance and annuity contracts, or acting as a viatical settlement broker as defined in s. 626.9911, including agents appointed to transact life insurance, fixed-dollar annuity contracts, or variable contracts by the same insurer. Section 8. Paragraph (b) of subsection (1) of section 626.112, Florida Statutes, is amended to read: 626.112 License and appointment required; agents, customer representatives, adjusters, insurance agencies, service representatives, managing general agents.-- (1) (b) Except as provided in subsection (6) or in applicable department rules, and in addition to other conduct described in this chapter with respect to particular types of agents, a license as an insurance agent, service representative, customer representative, or limited customer representative is required in order to engage in the solicitation of insurance. For purposes of this requirement, as applicable to any of the license types described in this section, the solicitation of insurance is the attempt to persuade any person to purchase an insurance product by: Describing the benefits or terms of insurance coverage, including premiums or rates of return; Distributing an invitation to contract to prospective purchasers; Making general or specific recommendations as to insurance products; Completing order or applications or insurance products; or Comparing insurance products, advising as to insurance matters, or interpreting policies or coverages; or Offering or attempting to negotiate on behalf of another persona a viatical settlement contract as defined in s. 626.9911. * * * Section 10. Subsection (2) of section 626.331, Florida Statutes, is amended to read: 626.331 Number of appointments permitted or required.- (2) An agent shall be required to have a separate appointment as to each insurer by whom he or she is appointed as an agent. An agent must appoint himself or herself before performing the functions of a viatical settlement broker. Section 11. Subsection (17) is added to section 626.611, Florida Statutes, to read: 626.611 Grounds for compulsory refusal, suspension, or revocation of agent's, title agency's, adjuster's, customer representative's, service representative's, or managing general agent's license or appointment.--The department shall deny an application for, suspend, revoke, or refuse to renew or continue the license or appointment of any applicant, agent, title agency, adjuster, customer representative, service representative, or managing general agent, and it shall suspend or revoke the eligibility to hold a license or appointment of any such person, if it finds that as to the applicant, licensee, or appointee any one or more of the following applicable grounds exist: (17) In transactions related to viatical settlement contracts as defined in s. 626.9911: Commission of a fraudulent or dishonest act. No longer meeting the requirements for initial licensure. Having received a fee, commission, or other valuable consideration for his or her services with respect to viatical settlements that involved unlicensed viatical settlement providers or persons who offered or attempted to negotiate on behalf of another person a viatical settlement contract as defined in s. 626.9911 and who were not licensed life agents. Dealing in bad faith with viators. * * * Section 14. Section 626.9911, Florida Statutes, is amended to read: 626.9911 Definitions.--As used in this act, the term: * * * (11) "Viatical settlement investment" has the same meaning as specified in s.517.021. The petition also discusses similar administrative complaints against persons other than Mr. Smith brought by the Department, a point upon which there is agreement, evidence the case, Department of Financial Services v. Bradley Wayne Kline, Case No. 849567-07-AG. Final order (filed 12/21/07), pertaining to the Recommended Order in DOAH Case No. 07-1218PL. In association with paragraphs 12.8 and 12.9 alleged to constitute Agency Statements defined as rules, evidence to support that allegation is as reflected in Exhibit "2" to the petition which states: FLORIDA DEPARTMENT OF FINANCIAL SERVICES ALEX SINK CHIEF FINANCIAL OFFICER September 06, 2007 JACKSON NATIONAL LIFE INSURANCE COMPANY BETH WRIGHT PO BOX 24068 LANSING MI 48909-4068 Re: GEORGE MARSHALL SMITH License Number DO34447 Dear Sir or Madam: This letter serves as official notice that the Department filed an Administrative Complaint against the above referenced individual on 08/22/2007. If you wish to receive a copy of the above referenced Administrative Complaint, you may return a copy of this letter with our request to the Department of Financial Services, Document Processing Section, PO Box 5320, Tallahassee FL 32314-5320 or fax your request to (850) 488-3429. They will retrieve the document(s) and invoice you as to the amount owed. Once the fee is received, the document(s) will be sent to you. If you have any questions concerning this matter, you should contact our legal division at (850) 413-3137. Bureau of Licensing FLDFS BUREAU OF LICENSING 200 EAST GAINES STREET*TALLAHASSEE, FLORIDA 32399-0319*(850) 413-3137 HTTP//WWW.FLDFS.COM This example is perceived as the form of "official notice" of an Administrative Complaint filed against George Marshall Smith and others similarly situated and the practice of invoicing and charging for copies of documents sent to persons who inquire about Administrative Complaints in this case or others of a similar nature.
The Issue Whether Respondent, Gregory Bruce Sample, should be disciplined for alleged statutory and rule violations for his role in several insurance transactions.
Findings Of Fact Count I – Jewel Frisani Jewel Frisani was born December 22, 1932. As of September 23, 2010, Ms. Frisani owned two annuities; one issued by MetLife and the other issued by ING Golden American (ING). Ms. Frisani was withdrawing $500 per month from each annuity for a total of $1,000 per month, or $12,000 per year. Death benefits were provided as a feature of each annuity. On September 23, 2010, Ms. Frisani attended a luncheon seminar hosted by Respondent. While at the seminar, Ms. Frisani completed a questionnaire wherein she provided her name, address, and phone number. The questionnaire directs that individuals completing the same should note thereon “Topics of Most Interest to Me.” The questionnaire lists some 25 topics and Ms. Frisani noted that she was only interested in having Respondent to “[r]eview[] [her] existing annuity(ies).” One of the listed topics is “[e]state [p]lanning.” Ms. Frisani did not indicate on the form that she was interested in discussing with Respondent matters related to planning her estate. Soon after the seminar, Respondent contacted Ms. Frisani and they agreed that they would personally meet on October 5 and October 11, 2010, to discuss matters related to her existing annuities. On October 5, 2010, Ms. Frisani met with Respondent to discuss her MetLife and ING annuities. During the meeting, Ms. Frisani showed Respondent a “Portfolio detail” for her ING annuity and a “snapshot” summary of her MetLife annuity. The “Portfolio detail” showed that as of September 30, 2010, the ING annuity had a market value of $65,604.77. The “snapshot” of Ms. Frisani’s MetLife annuity showed that at the beginning of the year, the opening value of her annuity was $50,638.98 and her closing value as of September 30, 2010, was $46,807.73. Neither the “Portfolio detail” nor the “snapshot” summary listed any charges associated with surrendering either annuity. During the meeting with Respondent on October 5, 2010, Ms. Frisani informed Respondent that her “annuities were going to be [the] inheritance for [her] granddaughter.” This explains why the words “Prisilla Frisani granddaughter” appear in Respondent’s handwriting on the bottom of the “Portfolio detail.” Although Ms. Frisani informed Respondent of her desire to leave an inheritance for her granddaughter, she did not impress upon Respondent that any new product(s) that she might purchase must offer death benefits in an amount not less than what she already had with MetLife and ING. Specifically, as to this issue, Ms. Frisani testified as follows: Q. What investment goals did you share with [Respondent] at that meeting? What did you tell him you wanted out of -- A. I wanted him to see if he could do better than what I was getting from my annuities. Q. Okay. And as you stated earlier, what you did like about your old annuities was that -- what was it that you stated earlier that you liked about your old annuities? A. Oh, that I was getting a thousand a month from my -- from my checking, and then they had death benefits for my granddaughter. Q. Did you also share with Mr. Sample that you wanted to continue those benefits? A. No, I didn’t mention that to him there. Q. You didn’t mention the death benefits? A. The death benefits, no. Q. Did you mention -- so you just mentioned that you wanted -- A. I wanted him to make sure that what he was doing would go in the trust, and that I would continue getting my thousand a month. Q. Okay. A. -- from the annuities -- Q. Okay. A. -- and that I wouldn’t lose no money by switching. Q. Okay. And you say he was aware that both annuities had death benefits? A. Well, I don’t know if he was aware of that or not, but Q. Okay. We didn’t discuss too much about the death benefits. Final Hearing Transcript, pp. 149-151. Respondent credibly testified that had Ms. Frisani explained to him that her objective was to maximize the death benefits payable to her granddaughter, then he would have recommended life insurance as a vehicle for her investments instead of annuities. Ms. Frisani also contends that during her meeting with Respondent on October 5, 2010, he assured her that she would not lose any money by surrendering the ING and MetLife annuities. When Ms. Frisani met with Respondent on October 5, 2010, she informed Respondent she was taking a $500 per month partial withdrawal from her ING annuity as well as a $500 per month partial withdrawal from her MetLife annuity. Ms. Frisani also had $200,000 in the bank, some of which may have been in a money market account. When asked if she shared information with Respondent concerning the $200,000, Ms. Frisani testified that “I might have mentioned it, yeah.” Ms. Frisani's ING annuity was characterized as a qualified retirement account. Due to her age, in order to avoid a tax penalty on this qualified account, Ms. Frisani was required to take a minimum distribution of four percent annually. Ms. Frisani's MetLife annuity was a non-qualified account. Therefore, she did not have to take from it any required minimum distributions (RMD). Respondent suggested to Ms. Frisani that as a means of paying less in taxes and obtaining growth on her investments, without losing any principal in the stock market, she should consider replacing the ING and MetLife variable annuities with National Western fixed annuities, and that for her $12,000 annual withdrawals she should take $3,000 a year in partial withdrawals from the National Western qualified annuity he was offering her and $9,000 a year from her money market account. The $3,000 per year in withdrawals from the qualified National Western annuity would satisfy her RMD without incurring any penalty. Since her money market account was paying very little interest, the $9,000 a year from this account would make up the balance of money she needed for her annual income. The non-qualified National Western annuity could then grow at a higher interest rate than the funds in Ms. Frisani's money market account. In order to assist Ms. Frisani with her efforts to learn more about the National Western annuity, Respondent, during the meeting of October 5, 2010, gave Ms. Frisani a copy of National Western's multi-page brochure. The brochure allowed Ms. Frisani to familiarize herself with the National Western annuity prior to their next meeting on October 11, 2010. On October 11, 2010, Ms. Frisani met with Respondent a second time. During this meeting, Ms. Frisani signed several forms related to the surrender of the ING and MetLife annuities, and the purchase of annuities from National Western. It is undisputed that each form was completed by Respondent and signed by Ms. Frisani. Ms. Frisani testified that she did not bother to read the documents that Respondent gave her to sign.3/ One of the forms signed by Ms. Frisani for each of the National Western annuities is the Annuity Suitability Questionnaire. The questionnaire asks two related questions. The first question asks “[w]ill the proposed annuity replace any product?” and the second asks “[i]f yes, will you pay a penalty or other charge to obtain these funds?” The answer noted on the form to the first question is “yes,” and the answer to the second question is “no.” During the October 11, 2010, meeting with Respondent, Ms. Frisani also signed, for both National Western annuity contracts, a “Disclosure and Comparison of Annuity Contracts” form (Comparison form). This form facilitates the side-by-side comparison of certain features of an existing annuity contract with those of a replacement annuity contract. Near the top of the Comparison form, there is a line where the contract number for the existing annuity is to be placed. On the Comparison form for the MetLife annuity, the contract number “3201353529” appears. This is the correct contract number for the MetLife annuity. On the Comparison form for the ING annuity, the contract number “I038301-0D” appears. This is the correct contract number for the ING annuity. Neither of these contract numbers appears on the “snapshot” or the “Portfolio detail” documents that Ms. Frisani presented to Respondent during their initial meeting on October 5, 2010. Ms. Frisani received quarterly statements from both ING and MetLife for the annuity contracts that she had with these companies. The ING and MetLife quarterly statements for the period ending September 30, 2010, each lists the annuity contract number, the contract date, and other pertinent information. The MetLife quarterly statement indicates that as of September 30, 2010, Ms. Frisani’s MetLife annuity had an account balance of $46,684.92 and a death benefit in the amount of $57,160.41. Ms. Frisani’s ING quarterly annuity statement for the period ending September 30, 2010, shows the following: Guaranteed Minimum Death Benefit $115,859.39 Accumulation Value $ 65,491.51 Surrender Charges $ 1,345.01 Cash Surrender Value $ 64,146.50 When Respondent met with Ms. Frisani on October 11, 2010, the evidence reasonably suggests that Ms. Frisani had her quarterly statements with her and presented the same to Respondent so as to assist him with completing the paperwork related to the surrender of Ms. Frisani’s existing annuities and the purchase of the new annuities from National Western. For Ms. Frisani’s MetLife annuity, Respondent wrote on the Comparison form that this annuity contract was issued in “Yr99.” The MetLife quarterly statement that Ms. Frisani presented to Respondent shows, however, that the actual date of issue for the MetLife annuity was April 22, 2005. The evidence does not sufficiently explain this discrepancy. For the MetLife annuity, Respondent also noted on the Comparison form that this annuity had a nine year surrender charge period and a first year surrender charge rate of nine percent that decreased by one percentage point each year that the annuitant maintained the policy. Although Respondent accurately noted the surrender period and related percentages on the Comparison form, it is not clear from the evidence where Respondent got this information, given that neither the MetLife quarterly statement for the period ending September 30, 2010, nor the “snapshot” make mention of surrender charges or related percentages. Respondent, nevertheless, obviously knew of the surrender period and related charges for Ms. Frisani’s MetLife annuity. The Comparison form also notes that the MetLife annuity provides for a “Waiver of Surrender Charge Benefit or Similar Benefit.” Again, however, there is nothing in the MetLife quarterly statement or “snapshot” that makes mention of the waiver of any surrender or similar charges. During the meeting with Respondent on October 11, 2010, Ms. Frisani also signed, for the MetLife annuity, a form titled “DISCLOSURE OF SURRENDER CHARGES IF EXISTING ANNUITY IS REPLACED OR EXCHANGED.” There is a section of the disclosure form where estimated surrender charges are noted. For this section, Respondent wrote in “0” as the amount of surrender charges associated with replacing the MetLife annuity with an annuity from National Western. Contrary to Respondent’s representations on the form, Ms. Frisani incurred $2,142.50 in surrender charges related to the surrender of the MetLife annuity contract. On October 11, 2010, when Respondent met with Ms. Frisani, he knew, or should have known, based on the information available to him, that Ms. Frisani would incur surrender charges related to the surrender of the MetLife annuity. The totality of the evidence as to this transaction indicates that Respondent willfully misled Ms. Frisani, thus causing her to be misinformed about the charges related to the surrender of her MetLife annuity. Petitioner also alleges that Ms. Frisani suffered financial harm as a result of Respondent deceiving her into believing that she would not incur charges related to the surrender of her ING annuity. According to Petitioner, Ms. Frisani incurred $1,345.01 in surrender charges related to this transaction. The evidence of record is insufficient to support this allegation. The “DISCLOSURE AND COMPARISON OF ANNUITY CONTRACTS” form that Respondent completed for Ms. Frisani’s ING annuity notes that nine years was the surrender charge period for this annuity. If this representation is true, the surrender charge would terminate in November 2009. Petitioner’s Exhibit 37 contains a summary of the terms of Ms. Frisani’s ING annuity and it shows seven years as the surrender charge period for this annuity. Whether it is seven years or nine years, neither of these yearly figures would result in a surrender charge, given that Ms. Frisani had held the ING annuity for nine years and eleven months at the time of actual surrender. To further complicate matters, Ms. Frisani’s ING quarterly statement for the period ending September 30, 2010, shows that if she were to surrender the annuity on September 30, 2010, she would incur $1,345.01 in surrender charges. As previously noted, Ms. Frisani’s ING annuity, as of September 30, 2010, had an accumulated value of $65,491.51. Subtracting the stated surrender charges would result in a cash surrender value of the ING annuity of $64,146.50. When this annuity was actually surrendered on or about October 25, 2010, ING issued a check in the amount of $65,172.33 to National Western for Ms. Frisani’s new annuity. The evidence does not explain with sufficient clarity why there is only a $319.18 difference between the accumulated value as of September 30, 2010, and the actual cash surrender value as of October 25, 2010. Also, on or about October 22, 2010, ING sent Ms. Frisani a “Confirmation Notice” regarding transactions related to her annuity account. The Confirmation Notice provides the name (Jeffrey A. Masters), phone number, and mailing address for Ms. Frisani’s ING financial advisor along with a notice advising that “The ING Variable Annuity Customer Contact Center is available Monday through Thursday 8:30 AM to 6:30 PM Eastern Time and Friday 8:30 AM to 5:30 PM Eastern Time at 1-800-366- 0066.” The Confirmation Notice also states the following: IMPORTANT NOTICE: Please carefully review all of the transactions detailed on this confirmation notice. You must inform us of any errors we may have made with respect to allocations of your investment dollars within30 days from the date of this notice. If you do not respond within 30 days, all allocations listed on this confirmation notice will be deemed final pursuant to your instructions. The Confirmation Notice lists two transactions with an effective date of October 22, 2010. The first transaction shows a “Total Cash Surrender” of $65,172.33, and the second transaction shows a “Total Surrender Charge” of $1,345.01. Independent of what Respondent may have told Ms. Frisani, she was given notice by ING that there was a $1,345.01 charge associated with surrendering her ING annuity and that she had 30 days from the date of the notice to inform ING about any irregularities associated with the transaction. There is no evidence that Ms. Frisani ever contacted ING or Jeffrey A. Masters about the $1,345.01 surrender charge. Also, Ms. Frisani had until November 21, 2010, to inquire about the surrender charges or any other matters, including death benefits, related to the surrender of her ING policy. There is no evidence suggesting that Ms. Frisani availed herself of this option. Petitioner failed to prove that Ms. Frisani suffered, as a consequence of Respondent’s conduct, financial harm in the amount of $1,345.01, as alleged. The Department also alleges that Respondent misrepresented to Ms. Frisani that she would receive a $9,000 bonus following her first year of ownership of the National Western annuities. Respondent denies this allegation. None of the documentary evidence references a $9,000 bonus and the only testimony regarding this alleged bonus is from Ms. Frisani. Ms. Frisani’s testimony, without more, is insufficient to satisfy Petitioner’s burden with respect to this allegation. In its Proposed Recommended Order, Petitioner contends that Respondent “stated on Ms. Frisani’s disclosure and comparison of annuity contracts that she would not incur any administrative fees or margins, but the National Western (annuity number 0101255052) contract clearly states otherwise.” It is correct that the disclosure and comparison form notes that the National Western annuity will have zero “Administrative fees or Margins.” The disclosure and comparison form in evidence does not define what constitutes an administrative fee or margin. Petitioner equates the “charge” that Ms. Frisani paid for the National Western annuity withdrawal benefit rider with an administrative fee, but the record does not support Petitioner’s conclusion. There is no indication that National Western considers the charge for the withdrawal benefit rider as an administrative fee. The National Western documents signed by Ms. Frisani advise that “[t]he Account Value of the policy is reduced each year by the Annual Rider Charge” and “[t]here is a charge for this rider, which is assessed annually.” (emphasis added). In looking at Ms. Frisani’s National Western statement for this annuity for the period November 4, 2010, through September 26, 2011, the only “fee” listed is an “Option A Asset Fee” that shows zero as the percentage associated with it. The annual rider charge is not listed as an “administrative” or any other type of fee. Without more, the undersigned is unable to conclude that the annual rider charge is the equivalent of an “administrative fee” as these terms are used in the disclosure and comparison form signed by Ms. Frisani on October 11, 2010. Respondent explained his rationale for recommending the National Western annuities to Ms. Frisani. He estimated that Ms. Frisani may have made $5,000 with her ING variable annuity in the ten years that she owned it and $5,000 with the MetLife variable annuity in the five years she owned that annuity, so her net return was a half percent and one percent, respectively. On the other hand, the National Western fixed annuities Respondent sold Ms. Frisani had a guaranteed five percent growth so she would be earning ten times the amount she had been making on her ING annuity and five times the amount for her MetLife annuity. The National Western annuities also included a five percent bonus, which approximated $6,000. Respondent summarized his comparison of the National Western annuities he sold Ms. Frisani with the ING and MetLife annuities she previously owned as follows: [S]o she had these old contracts with no safety, that had produced a half percent interest from the get-go for ten years. We moved her to National Western, which is an equity index annuity. The principal is fixed. It had a five percent income rider guarantee, which is what she wanted. And we were able to take the nonqualified account and just let it grow. The other is the qualified contract. She -- she has to take out four percent for her RMD. She's making five, which means she continues to actually make some money. Had she stayed with the variable, she was just depleting it every year by this four percent. So she was losing principal every year, so we stopped that. We stopped that. It's stopped cold. Final Hearing Transcript, pp. 1157-1158. Respondent further explained that Ms. Frisani's National Western annuities are structured so she can withdraw up to ten percent annually from the account, but if she does not take any withdrawals in the first year then she is allowed to take up to twenty percent in the second year, and if she elects not to take any withdrawals in the second year then she may withdraw up to thirty percent for the third year, and so on for the duration of the annuity period. Respondent had an objectively reasonable basis for recommending the National Western annuities to Ms. Frisani. Count II – Fred and Eileen Sarracino Fred Sarracino and Eileen Sarracino are married and reside in Lake Placid, Florida. Mr. Sarracino was born on September 20, 1934, and is a retired automobile mechanic. Mrs. Sarracino was born on February 1, 1935, and is retired from working for an insurance broker in Pennsylvania. In October 1993 Mr. Sarracino paid an initial premium of $2,000 towards the purchase of an Allmerica Financial Life Insurance and Annuity Company variable annuity contract (Commonwealth 46). Over the next 15 years, he added premium payments to Commonwealth 46 so that it had a surrender value of $46,435.53 on June 30, 2008, and an enhanced death benefit of approximately $54,000 on March 31, 2008. In October 1993 Mrs. Sarracino paid an initial premium of $2,000 towards the purchase of a separate Commonwealth variable annuity contract (Commonwealth 45). Over the next 15 years, she added premium payments to Commonwealth 45 so that it had a surrender value of $18,979.81 on June 30, 2008, and an enhanced death benefit of approximately $75,000 on March 31, 2008. In September 1997 Mrs. Sarracino paid an initial premium payment of $94,226.16 toward another Commonwealth variable annuity contract (Commonwealth 03). Over the next 11 years, she added premium payments to Commonwealth 03 so that it had a surrender value of $172,831.01 on June 30, 2008, and an enhanced death benefit of over $237,000 on March 31, 2008. During the initial months of 2008, Mr. and Mrs. Sarracino were losing money on their Commonwealth variable annuities and decided, in mid-2008, to attend a seminar presentation hosted by Respondent at a restaurant in Sebring, Florida. Mr. and Mrs. Sarracino met privately with Respondent on June 30, 2008. Acting on Respondent’s recommendations, Mr. Sarracino surrendered Commonwealth 46 and used the proceeds of $46,435.53 to purchase an Old Mutual Financial Life Insurance Company annuity (Old Mutual 67). Mrs. Sarracino surrendered Commonwealth 45 and applied the proceeds of $18,979.81 to purchase an Old Mutual annuity (Old Mutual 68). Mrs. Sarracino also surrendered Commonwealth 03 and applied the proceeds of $172,402.45 to purchase yet another Old Mutual annuity (Old Mutual 69). In total, Respondent earned $31,428.52 in commission from these transactions. When Respondent took the applications for each of the Old Mutual annuities, he misrepresented the financial profile of the Sarracinos on the annuity suitability forms. Respondent accomplished this in part by having the Sarracinos sign blank suitability forms which Respondent later filled in with false information.4/ Respondent falsely noted on the suitability form that Mrs. Sarracino’s monthly disposable income was $1,600. Mrs. Sarracino credibly testified that her monthly disposable income when she met with Respondent was more in the range of four to five hundred dollars. Respondent also falsely noted on the form that Mrs. Sarracino owned $60,000 worth of certificates of deposit (CDs), variable annuities amounting to $300,000, and had $60,000 in mutual funds. Respondent noted on the suitability form that Mr. Sarracino, like his wife, also had monthly disposable income in the amount of $1,600. This is false. Respondent also falsely noted on the form that Mr. Sarracino owned $60,000 worth of CDs, variable annuities totaling $300,000, and $60,000 in mutual funds. Finally, Respondent falsely stated that Mr. Sarracino owned a life insurance policy with a cash value of $10,000. The unrefuted evidence is that Mr. Sarracino has never owned a life insurance policy of any amount. Respondent willfully misrepresented the financial profile of the Sarracinos so that they could pass Old Mutual’s underwriting standards and he could receive a commission. Count III – Warren and Darlene Morgan Warren and Darlene Morgan are married and live in Port Charlotte, Florida. Mr. Morgan was born on May 24, 1947. Mrs. Morgan was born on April 21, 1948. In 2005, the Morgans decided they should consult a financial advisor closer to their home. In May and June 2005, the Morgans met with Respondent for the purpose of purchasing four Allianz annuities. On May 28, 2005, Mr. Morgan made an initial premium payment of $56,949.16 toward the purchase of the first Allianz annuity contract (Allianz 32). On May 28, 2005, Mr. Morgan made an initial premium payment of $16,701.27 toward the purchase of a second Allianz annuity contract (Allianz 22). On May 28, 2005, Mrs. Morgan purchased the third Allianz annuity contract (Allianz 02). The initial premium payment was $16,701.27. On June 15, 2005, Mrs. Morgan purchased the fourth Allianz annuity contract (Allianz 43). She made three premium payments on this policy between May 28, 2005, and June 15, 2005, totaling $68,040.34. Each of the Allianz annuities Respondent sold the Morgans was intended as a long-term investment as evidenced by the respective annuities’ multi-year surrender charge periods and high surrender charge penalties. After purchasing the Allianz annuities, the Morgans and Respondent met annually to review the Morgans' investments, but until 2010, they decided not to change anything. In early calendar year 2010, Respondent, consistent with the practice of conducting their annual review, called the Morgans and informed them of a new product that might appeal to them. Respondent and the Morgans met on January 7, 2010, and Mrs. Morgan testified that Respondent compared the new product with the Allianz annuities they owned. Mrs. Morgan stated in her testimony that “we asked a lot of questions” during the meeting with Respondent. Mrs. Morgan thoughtfully considered the merits of purchasing the new product and explained that initially she was opposed to replacing their Allianz annuities because she believed the surrender penalty that she and her husband would pay was too steep a price for the exchange. She testified, however, that her husband, Warren, wanted to make the change and so she agreed to do so. On January 7, 2010, when they met with Respondent, Darlene and Warren Morgan were 61 and 62 years of age, respectively, and their investment objective remained focused on growth. During the meeting, Respondent suggested that the Allianz annuities should be replaced with annuities issued by Forethought Life Insurance Company (Forethought) and Old Mutual Financial Life Insurance Company (OM). The Forethought annuities were offering a new feature known as an "income rider" that was not available when the Morgans purchased the Allianz annuities in 2005. Allianz 32 was exchanged for a Forethought annuity contract (Forethought 03). Mr. Morgan incurred a surrender penalty of $6,151.79 for exchanging this Allianz annuity, which at the time of the exchange was valued at approximately $58,000. Allianz 22 was exchanged for an OM annuity (OM 57). Mr. Morgan incurred a surrender penalty of $4,441.09 for exchanging this Allianz annuity, which at the time of the exchange was valued at approximately $16,000. Allianz 43 was exchanged for a Forethought annuity (Forethought 92). Mrs. Morgan incurred a surrender penalty of $21,469.82 for exchanging this Allianz annuity, which at the time of the exchange was valued at approximately $65,000. Allianz 02 was exchanged for an OM annuity (OM 58). Mrs. Morgan incurred a surrender penalty of $4,441.09 for exchanging this Allianz annuity, which at the time of the exchange was valued at approximately $16,000. Combined, the Morgans incurred $36,503.79 in surrender penalties associated with the exchange of their annuities. Respondent’s total commission for these transactions was $16,581.62. The Administrative Complaint alleges that Respondent “hurriedly pushed annuity application and suitability forms in front of Mr. and Mrs. M[organ] and had them sign them without allowing them any time to review them,” and that the “entire meeting on or about January 7, 2010, lasted approximately 20 minutes.” The Administrative Complaint also alleges that consistent with Respondent’s alleged conduct of rushing the Morgans, he had them sign blank forms related to the exchange of the Allianz annuities. According to Mrs. Morgan’s testimony, the meeting with Respondent on January 7, 2010, lasted approximately 45 minutes (more than twice as long as alleged), during which they “asked a lot of questions.” As for the issue of allegedly signing blank forms, Mrs. Morgan testified as follows: Q: Did you sign blank forms or were they partially filled out? A: I don’t know. Because he was at his desk writing very fast. Part of it could have been filled out. Final Hearing Transcript p. 645 Q: All right. But what I’m asking you is: As you sit here today, can you state with certainty that any of the forms that he had you sign were, in fact, blank? A: No, I cannot state with certainty that. Final Hearing Transcript p. 678 The evidence is insufficient to clearly and convincingly establish that the Respondent rushed the Morgans into exchanging their Allianz annuities or that Respondent had them to sign blank documents. Respondent, in filling out the transfer, application, and suitability forms for the purchase of the Forethought and OM annuities, listed therein information regarding the Morgans that was false. Respondent included a false statement that the Morgans had a net worth of $400,000, excluding the value of their home, that the Morgans’ liquid assets totaled $65,000, and that the Morgans owned CDs. Respondent willfully misrepresented the financial profile of the Morgans so that they could pass the Old Mutual and Forethought underwriting standards thereby allowing him to receive a commission. Petitioner, in its Proposed Recommended Order, offers several proposed factual findings that ultimately show, “[b]ased on all of the evidence, [that] there was no objectively reasonable basis to recommend the Morgans’ annuity exchanges. § 627.4554(4)(a), Fla. Stat. (2010).” Section 627.4554, by its express terms, only applies to “Senior consumers” that are “65 years of age or older.” Neither of the Morgans was within this age range when they met with Respondent in 2010 and, therefore, section 627.4554 cannot be relied upon by Petitioner as a basis for imposing disciplinary action against Respondent. Count IV Petitioner withdrew Count IV of its Administrative Complaint. Count V – Joel and Evelyn Langer Petitioner alleges that Respondent told Joel and Evelyn Langer that he was familiar with the “IRS 72t rule,” when in reality he was not, and because of his unfamiliarity with this rule, this meant that Respondent “knew that by selling the Langers’ annuities, they would incur substantial withdrawal penalties [pursuant to] the terms of the[ir] annuity contracts.” The essence of this allegation is that Respondent did something wrong in arranging for the issuance of the OM annuities that adversely affected the Langers’ 72(t) protections with the Internal Revenue Service (IRS) and also caused them to lose money. Joel and Evelyn Langer are married and reside in Port Charlotte, Florida. Mr. Langer was born on September 10, 1948. Mrs. Langer was born on August 31, 1949. During their employment, Mr. and Mrs. Langer put their savings in mutual funds managed by Royal Bank of Canada Wealth Management (RBC). Mr. and Mrs. Langer were forced into early retirement before reaching age 59 1/2. The mutual fund investments then became their only liquid assets and they depended on these funds for income. On February 21, 2008, Mr. and Mrs. Langer, who were 58 and 59 years of age respectively, attended a luncheon seminar Respondent hosted in Port Charlotte, Florida. The Langers were interested in obtaining more information about annuities, because they had their life savings invested in the stock market, which was rapidly declining, and they were looking to move their funds to another investment product. The Langers felt annuities would be “a safer investment.” The Langers met with Respondent and explained that they would need immediate income that would qualify for disbursement under the 72(t) provisions of the federal income tax code. Because the Langers had been forced into early retirement, they had elected to draw on their investments through the 72(t) provisions of the federal income tax code. The 72(t) provisions allow the investor, prior to age 59 1/2, to receive distributions from their retirement investment, in substantially equal periodic payments without paying a penalty for early withdrawal, provided the investor receives the distribution for a period of five years without interruption. Respondent placed all of Mr. and Mrs. Langer’s liquid assets into three Old Mutual annuity contracts, hereinafter “Old Mutual 02,” “Old Mutual 03” and “Old Mutual 04.” On March 7, 2008, Mrs. Langer purchased Old Mutual 02. The initial premium was paid with an RBC check in the amount of $237,563.23, made payable to Old Mutual Financial Life. Respondent earned a commission in the amount of $26,131.96 for this transaction. On March 7, 2008, Mr. Langer purchased Old Mutual 03. The initial premium was paid with an RBC check in the amount of $393,073.89, made payable to Old Mutual Financial Life. Respondent earned a commission in the amount of $43,238.13 for this transaction. On March 7, 2008, Mrs. Langer purchased Old Mutual 04. The initial premium was paid with an RBC check in the amount of $72,572.48, made payable to Old Mutual Financial Life. Respondent earned a commission in the amount of $7,982.97 for this transaction. As previously noted, Petitioner alleges that the Langers incurred “substantial withdrawal penalties” as a consequence of Respondent botching the paperwork related to the Langers maintaining the protections afforded by the IRS 72(t) rule. Although the evidence is not at all clear as to the amounts of the alleged penalties, it appears as though the Langers did not actually incur any penalties, as alleged, because OM, on or about April 8, 2008, issued refund checks to Mr. and Mrs. Langer in the amounts of $1,329 and $2,018, respectively. As for the alleged mishandling by Respondent of the Langers’ IRS 72(t) paperwork, Petitioner's expert witness, John Richard Brinkley, testified that he assumed Respondent failed to send the IRS the necessary paperwork to entitle the Langers to the IRS rule 72(t) privileges for the OM annuities sold to them by Respondent. Mr. Brinkley conceded, however, that he never verified whether the necessary forms were or were not delivered, or to whom such fault should be allocated. Similarly, both Mr. and Mrs. Langer conceded during their testimony that they could not say whether it was Respondent's supposed error in qualifying the OM annuities under the IRS rule 72(t) provisions, or whether the supposed error was the fault of OM itself. The unrefuted evidence is that Respondent faxed OM specific instructions to set up the annuities so that the annuities complied with the IRS rule 72(t) provisions and that OM subsequently confirmed, in letters sent to each of the Langers, that the annuities indeed were being set up to conform to the IRS rule 72(t) provisions. While there is evidence that Respondent initially may have completed the incorrect OM form for this transaction, the evidence is inconclusive as to the effect this had on how the OM annuities were originally structured by the company. Additionally, the Department's investigator, Juanita Midgett, wrote to OM inquiring as to whether Respondent bore any responsibility in ensuring that the annuities he sold the Langers did, in fact, conform to the IRS rule 72(t) provisions. OM's letter in response stated that Respondent bore no responsibility for any “premature penalty tax,” and reminded Ms. Midgett that the Langers were required “to consult their personal tax advisor before submitting a request should they elect to take early distributions from their retirement funds.” Petitioner has failed to meet its burden of proof with respect to this issue. The Administrative Complaint also alleges that “[d]ue to [Respondent’s] failure to take into account the L[angers’] necessity for a monthly income, the OM 02 and OM 03 contracts had to be reissued thereby altering the initial premiums” paid by the Langers. The only argument advanced by Petitioner in its Proposed Recommended Order as to this issue is found in paragraph 35 wherein Petitioner simply restates that Respondent “failed to properly account for the Langers’ need for a monthly income and, as a result, the Old Mutual 02 and Old Mutual 03 contracts had to be reissued thereby altering the initial premiums” paid by the Langers. It is unclear from the evidence why the referenced contracts had to be reissued. Petitioner’s allegations imply that the “altering [of] the initial premiums” resulted in the Langers incurring additional expense as a result of the error, but the evidence is inconclusive as to whether the premium amounts increased or decreased. Petitioner failed to meet its burden of proof with respect to this issue. Paragraph 71(c) of the Administrative Complaint alleges that Respondent “never explained to the [Langers] that all three annuities had huge surrender charge rates and periods, starting at 17.5% for the first year of ownership and diminishing thereafter until the penalty percentage reached 4.5% in the fourteenth year of ownership.” Remarkably, Petitioner’s Proposed Recommended Order as to this allegation simply restates, verbatim, the allegation from the Administrative Complaint and only cites to the annuity contracts themselves as record support for the allegation.5/ This allegation is not sufficiently supported by the evidence, given that Mrs. Langer testified that Respondent explained to them, with respect to the issue of surrender charges associated with the annuities, that they “had to remain in [the annuities] for a period of years.” Paragraph 71(d) of the Administrative Complaint alleges that Respondent “knew that the Langers wanted to be done with the risks associated with the stock market and yet [he] pegged all three Old Mutual annuities to S&P 500 indices in determining their income returns.” Once again, Petitioner merely restates in its Proposed Recommended Order the allegation from the Administrative Complaint and only cites to the annuity contracts themselves as record support for the allegation. Nevertheless, Mrs. Langer testified that “at the seminar, [Respondent] went over the benefits [of the] annuities and went into detailed explanations of his annuity plans being tied to the S&P 500, and he did quite a bit of explaining at the seminar.” The Langers knew that the annuity products that Respondent was selling were tied to the S&P 500 well in advance of purchasing the products. The evidence clearly establishes that the Langers knew what Respondent was selling and that they made a conscientious and informed decision when they ultimately decided to purchase the three Old Mutual annuities. Paragraph 71(e) of the Administrative Complaint alleges that Respondent “checked a box on the Old Mutual suitability forms indicating that Mr. and Mrs. Langer declined to answer the questions propounded on the form, which was false.” Respondent explained that he discussed with the Langers the nature of their assets, but because the totality of their assets consisted of the money in their brokerage account, there was no purpose in completing the "Customer Profile" section of the suitability forms, and so he checked the line on the OM forms indicating that the Langers were declining to answer the questions. Mr. Langer testified that they “explained to [Respondent] that [they] had no other assets to consider” besides their mutual funds. Given this, it is inconsequential that Respondent checked the box signifying that the Langers declined to answer the "Customer Profile" questions. Paragraph 71(g) of the Administrative Complaint alleges that Respondent “refused to respond to the Langers’ inquiries once they discovered the financial losses they suffered [due to] his recommendations.” Respondent generally denies this allegation but offers no specific defense in response thereto. Mrs. Langer credibly testified that Respondent “would not return her calls” after she and her husband realized that there was a problem with the application of IRS rule 72(t) to their Old Mutual annuities. The evidence does not quantify the number of calls or the length of the time period during which the Langers made calls to Respondent. Respondent’s failure to return Mrs. Langer’s phone calls is, under the facts present, inconsequential given that the evidence is not clear and convincing regarding any culpability on Respondent’s part with respect to Old Mutual’s processing of the Langer’s IRS rule 72(t) paperwork. Paragraph 71(h) of the Administrative Complaint alleges that Respondent “never explained the ‘free look’ provision of the three Old Mutual contracts.” As to this allegation, Petitioner, in its Proposed Recommended Order, offers as its only proposed finding of fact that Respondent “nullified the free look option by pre-dating the delivery receipt so as to eliminate the Langer’s option to cancel the contracts.” Alleged actions of “pre-dating” a delivery receipt are substantively different from actions related to the alleged “failure to explain” a contractual provision. Respondent had no pre-hearing notice of the allegation that Respondent “pre-dated” the delivery receipt and therefore this allegation, even if true, is irrelevant to the allegation that Respondent never explained the free look provision of the three Old Mutual annuities. Petitioner has failed to satisfy its burden of proof with respect to the allegation that Respondent “never explained the ‘free look’ provision of the three Old Mutual contracts.” Petitioner has failed to prove by clear and convincing evidence any violations by Respondent with respect to his dealings with the Langers. Count VI – Gail Shane On February 16, 2012, Gail Shane, who was 65 years old at the time (born June 17, 1946) and an unmarried woman, attended a luncheon seminar conducted by Respondent in Sebring, Florida. At the luncheon, Respondent shared with Ms. Shane information that convinced her that Respondent could place her in an investment product suitable for her needs. Ms. Shane met with Respondent in his Sebring office on March 6, 2012. During this meeting, Ms. Shane explained to Respondent that she was looking for an investment product where she could simply park $5,000 and let it “grow,” and that she was not looking for the investment product to provide her with income. In other words, Ms. Shane wanted an annuity product that would guarantee growth and not reduce her principal investment amount. Per Respondent’s recommendation, Ms. Shane purchased a $5,000 annuity issued by National Western Insurance Company (National Western). Respondent’s commission for this transaction was $500. During the meeting with Ms. Shane on March 6, 2012, Respondent did not explain to Ms. Shane that the National Western annuity contained a yearly withdrawal benefit rider that cost $40.95 per year. According to the annuity contract, the withdrawal benefit rider “provides guaranteed minimum withdrawal benefits . . . in an amount selected by [Ms. Shane on a] semi-annual, quarterly, or monthly payment” basis. At the time of purchase, Ms. Shane did not bother to read the terms and conditions of the annuity product and her omission, coupled with Respondent’s failure to explain to her the inclusion in the policy of the yearly withdrawal benefit rider, resulted in Ms. Shane not knowing that the annuity contained the rider. It was only after Ms. Shane received a statement from National Western that she realized that her annuity contained a rider that she did not need and that was otherwise inconsistent with her investment goals of “growth without principal reduction.” Ms. Shane, upon learning of the existence of the yearly withdrawal benefit rider, immediately notified National Western and directed the company to remove the rider from her annuity. Per Ms. Shane’s request, National Western removed the rider from her annuity policy. Respondent did not have an objectively reasonable basis for believing that Ms. Shane desired to have the yearly withdrawal benefit rider as part of her annuity contract. Paragraph 79(d) of the Administrative Complaint alleges that Respondent never explained to Ms. Shane that the National Western annuity “had huge surrender charge rates and periods, starting at 15% for the first year of ownership and diminishing thereafter until the penalty percentage reached 2% in the thirteenth year of ownership.” As previously mentioned, Ms. Shane’s investment objectives were such that she wanted to park her $5,000 initial investment and let it grow. It is true that Respondent did not explain the surrender charge rates to Ms. Shane. However, his failure to do so is not of legal significance given her stated investment strategy. Paragraph 79 of the Administrative Complaint also alleges that Respondent had Ms. Shane to sign suitability forms that were in many respects blank and that Respondent “completed the forms outside [Ms. Shane’s] presence . . . [and] failed to provide a copy to Ms. S[hane] for her review so that she could discover the falsehoods that were being forwarded to National Western [for] its underwriter’s review.” Specifically, paragraph 79(e) of the Administrative Complaint alleges that “after obtaining Ms. S[hane]’s signature on the annuity suitability form, [Respondent] completed the form outside her presence and indicated therein that she had a net worth of $1,000,000 knowing that [this representation] was completely, utterly, and absurdly false.” Ms. Shane credibly testified that when she met with Respondent on March 6, 2012, her net worth was somewhere in the neighborhood of $258,000; not anywhere near the $1,000,000 that Respondent noted on the suitability form. Petitioner’s Hearing Exhibit 261, p. 803, is the Accredited Investor Acknowledgment Form (Acknowledgment Form) signed by Ms. Shane on March 6, 2012. The first sentence of the Acknowledgment Form provides that “National Western Life Insurance Company is prohibited by Florida Law from selling the annuity for which you have applied to any senior consumer (a purchaser 65 years of age or older) unless that senior consumer is an “Accredited Investor.” The Acknowledgment Form also states the following: Florida law defines an “Accredited Investor” as any person who comes within any of the following categories at the time of the sale of an annuity to that person: The person’s net worth or joint net worth with his or her spouse, at the time of purchase, exceeds $1 million; or The person had an individual income in excess of $200,000 in each of the 2 most recent years, or joint income with his or her spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year. The Acknowledgment Form then requires the proposed annuitant to check the appropriate box, sign, and date the form. Respondent checked the box after Ms. Shane signed the form and noted thereon that Ms. Shane’s net worth “exceeds $1 million.” Paragraph 79, subparts (f), (g) and (h), of the Administrative Complaint allege, collectively, that “after obtaining Ms. S[hane]’s signature on the annuity suitability form, [Respondent] completed the form outside her presence and indicated therein that she had an annual income of $50,000.00, . . . liquid assets amounting to $80,000.00, . . . [and] that she owned her own home and that she owned real estate worth $500,000.00, knowing that such information was false.” Ms. Shane credibly testified that in March 2012, her annual income was “closer to $30,000.00,” her liquid assets were “$8,000.00,” she rented and did not own a home, and that her undeveloped real estate was “worth about $50,000.00.” The Acknowledgement Form makes it abundantly clear that the only way that Respondent could sell the National Western annuity product to Ms. Shane was to qualify her as an “Accredited Investor.” In the absence of Ms. Shane being qualified as such, Respondent would not earn a commission. The evidence clearly and convincingly establishes that Respondent willfully misrepresented Ms. Shane’s annual income, net worth, liquid assets, residential status, and real estate holdings so that he could receive a commission for the sale of the National Western annuity.6/
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Financial Services, Division of Insurance Agents and Agency Services, enter a Final Order finding that Respondent violated sections 626.611(5), (7) and (9), 626.9541(1)(e)1., and 627.4554(4)(a), Florida Statutes. It is further recommended that the Department revoke his Florida licenses to act as an insurance agent in this state and impose against him a fine in the amount of $140,000. DONE AND ENTERED this 29th day of October, 2014, in Tallahassee, Leon County, Florida. S LINZIE F. BOGAN Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 29th day of October, 2014.
The Issue The issue for determination is whether Proposed Rule 69O-204.101 is an invalid exercise of delegated legislative authority.
Findings Of Fact Respondent, Office of Insurance Regulation (hereinafter referred to as "OIR"), is an agency of the State of Florida, created within the Financial Services Commission (hereinafter referred to as "Commission"). § 20.121(3)(a)1., Fla. Stat. (2007).2 Pursuant to Subsection 21.121(3)(a), the OIR is responsible for all activities concerning insurers and other risk-bearing entities, including licensing, rates, policy forms, market conduct, claims, issuance of certificates of authority, solvency, viatical settlements, premium financing, and administrative supervision, as provided under the Florida Insurance Code or Chapter 636. The Florida Insurance Code includes Chapters 624 through 632. The Commissioner of Insurance Regulation is the agency head of the OIR. However, the Commission is the agency head for purposes of rulemaking. § 20.121(3)(c). The matter at issue in this proceeding is Respondent's Proposed Rule 69O-204.101 entitled, "Disclosures to Viator of Disbursement" (the "Proposed Rule"). The Commission advertised the text of the Proposed Rule on November 30, 2007, in Volume 33, Number 48, of the Florida Administrative Weekly, and, subsequently, filed a Notice of Change to the Proposed Rule on February 15, 2008, and, again, on February 22, 2008. A final public hearing regarding the Proposed Rule was conducted by the Commission on March 25, 2008, at which time the Commission approved the Proposed Rule for final adoption. According to the published notice, the purpose and effect of Proposed Rule 69O-204.101 is "to establish disclosures to viators of reconciliation of funds." The text of the Proposed Rule, as noticed for final adoption, reads as follows: 69O-204.101 Disclosures to Viator of Disbursement. Prior to or concurrently with a viator's execution of a viatical settlement contract, the viatical settlement provider shall provide to the viator, in duplicate, a disclosure statement in legible written form disclosing: The name of each viatical settlement broker who receives or is to receive compensation and the amount of each broker's compensation related to that transaction. For the purpose of this rule, compensation includes anything of value paid or given by or at the direction of a viatical settlement provider or person acquiring an interest in one or more life insurance policies to a viatical settlement broker in connection with the viatical settlement contract; and A complete reconciliation of the gross offer or bid by the viatical settlement provider to the net amount of proceeds or value to be received by the viator related to that transaction. For the purpose of this rule, gross offer or bid shall mean the total amount or value offered by the viatical settlement provider for the purchase of an interest in one or more life insurance policies, inclusive of commissions, compensation, or other proceeds or value being deducted from the gross offer or bid. The disclosure statement shall be signed and dated by the viator prior to or concurrently with the viator's execution of a viatical settlement contract with the duplicate copy of the disclosure statement to be retained by the viator. If a viatical settlement contract has been entered into and the contract is subsequently amended or if there is any change in the viatical settlement provider's gross offer or bid amount or change in the net amount of proceeds or value to be received by the viator or change in the information provided in the disclosure statement to the viator the viatical settlement provider shall provide, in duplicate, an amended disclosure statement to the viator, containing the information in paragraphs (1)(a) and (b). The amended disclosure statement shall be signed and dated by the viator with the duplicate copy of the amended disclosure statement to be retained by the viator. The viatical settlement provider shall obtain the signed and dated amended disclosure statement. Prior to a viatical settlement provider's execution of a viatical settlement contract, the viatical settlement provider must have obtained the signed and dated disclosure statement and any amended disclosure statement required by this rule. In transactions where no broker is used the viatical settlement provider must have obtained the signed and dated disclosure statement from the viator. The documentation required in this rule shall be maintained by the viatical settlement provider pursuant to the provisions set forth in Subsection 626.9922(2), Florida Statutes, and shall be available to the office at any time for copying and inspection upon reasonable notice to the viatical settlement provider. The Proposed Rule cites Subsection 624.308(1) and Section 626.9925 as specific authority for the Proposed Rule. The Proposed Rule cites Sections 626.9923, 626.9924, and 626.9925 as the law implemented by the Proposed Rule. The Proposed Rule involves regulation of viatical settlement providers pursuant to Florida's Viatical Settlement Act, Part X, Chapter 626 (hereinafter referred to as the "Act"). The Act regulates both viatical settlements and life settlements. The Act does not define "viatical settlement" or "life settlement." However, both types of transactions involve the sale of the ownership interest in life insurance policies. A "viatical settlement" involves the sale of an ownership interest in a life insurance policy by a person who is expected to live for less than two years. A "life settlement" involves the sale of the ownership interest in a life insurance policy by a person who is expected to live longer than two years after the date of the sale. Viatical settlements and life settlements are regulated in essentially the same manner and each of the foregoing transactions are included in the definition of "viatical settlement contract" as defined in the Act. Therefore, references to "viatical settlements" under Florida law refer to both life settlements and viatical settlements. Subsection 626.9911(10) defines "viatical settlement contract" as follows: (10) "Viatical settlement contract" means a written agreement entered into between a viatical settlement provider, or its related provider trust, and a viator. The viatical settlement contract includes an agreement to transfer ownership or change the beneficiary designation of a life insurance policy at a later date, regardless of the date that compensation is paid to the viator. The agreement must establish the terms under which the viatical settlement provider will pay compensation or anything of value, which compensation or value is less than the expected death benefit of the insurance policy or certificate, in return for the viator's assignment, transfer, sale, devise, or bequest of the death benefit or ownership of all or a portion of the insurance policy or certificate of insurance to the viatical settlement provider. A viatical settlement contract also includes a contract for a loan or other financial transaction secured primarily by an individual or group life insurance policy, other than a loan by a life insurance company pursuant to the terms of the life insurance contract, or a loan secured by the cash value of a policy. In a viatical settlement transaction, the "viatical settlement provider" is the purchaser of the ownership interest in a life insurance policy, including the right to receive the policy proceeds upon the death of the insured. Also see § 626.9911(12).3 The "viator" is the owner of an insurance policy who sells the ownership interest in the policy. Also see § 626.9911(14).4 The term "viatical settlement broker" is defined in Subsection 626.9911(9), as follows: (9) "Viatical settlement broker" means a person who, on behalf of a viator and for a fee, commission, or other valuable consideration, offers or attempts to negotiate viatical settlement contracts between a viator resident in this state and one or more viatical settlement providers. Notwithstanding the manner in which the viatical settlement broker is compensated, a viatical settlement broker is deemed to represent only the viator and owes a fiduciary duty to the viator to act according to the viator's instructions and in the best interest of the viator. The term does not include an attorney, licensed Certified Public Accountant, or investment adviser lawfully registered under chapter 517, who is retained to represent the viator and whose compensation is paid directly by or at the direction and on behalf of the viator. Pursuant to Subsection 626.9911(9), the "viatical settlement broker" is an agent of the viator and, as such, owes a fiduciary duty to the viator to obtain the best price for the insurance policy. Thus, typically, the viatical settlement broker solicits bids from multiple viatical settlement providers on behalf of the viator. The Proposed Rule requires viatical settlement providers to furnish viators with a detailed accounting of all funds involved in viatical settlement transactions and to ensure that viators are aware of the accounting. The issues of disclosures required for viatical settlement contracts and transactions are addressed in two provisions of the Act, Sections 626.99181 and 626.9923. Section 626.99181, Florida Statutes, requires a viatical settlement broker to disclose its compensation and states, "[a] viatical settlement broker shall disclose to a prospective viator the amount and method of calculating the broker's compensation." That provision states the "compensation" includes "anything of value paid or given to a viatical settlement broker for the placement of a policy." Section 626.9923 addresses viatical settlement contracts and required disclosures to viators and states that: Viatical settlement contracts; required disclosures.--The viatical settlement broker, or the viatical settlement provider in transactions in which no broker is used, must inform the viator by the date of application for a viatical settlement contract: That there are possible alternatives to viatical settlement contracts for persons who have a catastrophic or life-threatening illness, including, but not limited to, accelerated benefits offered by the issuer of a life insurance policy. That proceeds of the viatical settlement could be taxable, and assistance should be sought from a personal tax advisor. That viatical settlement proceeds could be subject to the claims of creditors. That receipt of viatical settlement proceeds could adversely affect the recipient's eligibility for Medicaid or other government benefits or entitlements, and advice should be obtained from the appropriate agencies. That all viatical settlement contracts entered into in this state must contain an unconditional rescission provision which allows the viator to rescind the contract within 15 days after the viator receives the viatical settlement proceeds, conditioned on the return of such proceeds. The name, business address, and telephone number of the independent third- party escrow agent, and the fact that the viator may inspect or receive copies of the relevant escrow or trust agreements or documents. Petitioner is an established trade association in the life settlement industry and is comprised of over 175 member companies, some of which include Florida-licensed viatical settlement providers who would be subject to the Proposed Rule. Petitioner's members would be substantially affected by the Proposed Rule because it would require them to make disclosures to viators in addition to the disclosures required by the Act.
Findings Of Fact Respondent is licensed as a real estate broker and was so licensed at all times relevant hereto. He has taught real estate salesman courses at Hillsborough Junior College for about eight years. In February, 1982, Thomas E. Webb and Johnnie M. Webb, husband and wife, signed an offer to purchase real estate owned by Ruby Carline (Exhibit 1). This document was prepared by Respondent as broker and signed by him as witness and escrow agent. The offer was not accepted by the seller. Respondent had a listing agreement (Exhibit 6) on property owned by Ruby Carline in Seffner, Florida, giving him exclusive right to sell this property until June 12, 1982, at a price of $65,800, with buyer assuming an existing mortgage of $27,000 at ten (10) percent. There was also a second mortgage on the property in the amount of $10,000 at eighteen (18) percent. Shortly after Exhibit 1 was not accepted by Carline, the Webbs' trailer burned and they needed a residence quickly. Respondent inquired of Carline how much she would take to move out of her house and she told him $10,000, but needed $2,000 to actually relocate her furniture. On March 5, 1982, Respondent acknowledged receipt of $2,000 from Webb (Exhibit 7). Shortly thereafter, this money was paid to Carline and she vacated her house. Webb moved in during the latter part of March and commenced paying rent. Following this, Respondent prepared an updated contract for sale and purchase which was signed by Thomas Webb and Ruby Carline in early May (Exhibit 3). This contract provided for a purchase price of $59,900, with 7,000 deposit held in escrow by Respondent, and the balance of the purchase price comprising the existing first mortgage of $27,000 to be assumed by the buyer; a purchase money mortgage in the amount of $15,900 to be obtained; and the second mortgage in the amount of $10,000. Special Clause XII provided: Buyer shall rent property for $560 per month with an option to purchase by June 12, 1982, which shall be extended an additional 90 days at time of purchase. Buyer shall assume first mortgage and pay balance to seller. At the time this contract was executed Webb had paid Respondent $7,000. The additional $5,000 cashier's check was given to Respondent by Webb on April 27, 1982 (Exhibit 7) and Exhibit 3 was thereafter prepared. The $5,000 was not placed in escrow but in Respondent's operating account. By check dated May 1, 1982, Respondent disbursed $2,666 to Carline from the proceeds of this down payment plus some rent moneys collected from Webb and claimed the balance of $3,594 as commission on the sale of the property. Carline testified that she received only $1,000 from Respondent in the form of a check when she moved out of the house. Respondent actually paid her $2,000, of which $1,000 was in cash. In her letter to Respondent dated January 1, 1983 (Exhibit 11), Carline acknowledged the $2,000 as a gratuitous payment to her vacating the property and resettling elsewhere. Webb was expecting fire insurance money on his trailer which was to provide funds necessary to pay off the second mortgage. They expected to get additional financing either from a bank or from the seller, or both. When it became evident Webb was experiencing difficulty obtaining financing, Respondent prepared Exhibit 2, another contract for sale and purchase, executed by seller October 22, 1982, which, in Special Clause XII stated: This is a lease option contract, buyer has 30 days to close on property. Rent shall be $560 per month until property is transferred. Property is being purchased "as is". Commission has been paid by seller. This contract also provided for purchase price of $59,900. Deposit (paid to owner-seller Ruby Carline) of $7,000, buyer to assume existing first mortgage of $27,000, the second mortgage to General Finance Corporation in the amount of $10,000 to be paid off and balance to close of $25,900. Clause III provided that if any part of the purchase price is to be financed by third party loan, the contract is contingent upon the buyer obtaining a firm commitment for said loan within 30 days at a rate not to exceed 18 percent for 15 years in the principal amount of $25,000. At the time this contract was signed, all parties knew the buyer needed additional financing to close. While the Webbs occupied the house, Respondent collected the rent, usually in cash, and remitted same to Carlile in the manner received. By the time the closing date of September 12, 1982, arrived, it became evident Webb was having difficulty obtaining financing and would be unable to close. Webb demanded return of the $7,000 deposit from Respondent and Carline. Carline demanded Respondent pay her all of the moneys received by him from Webb; and Respondent claimed a set-off of fees paid by him for appliance repairs, for the institution of eviction proceedings against Webb and for services in collecting the rent for Carline. Respondent paid Webb some $1,200 and attempted to get Carline to release him from liability for further payment to Carline (Exhibit 15). Carline reported the incident to the Real Estate Commission.
The Issue The issues for determination in this case are whether Respondent violated the law as charged by Petitioner in its Administrative Complaint, and, if so, what discipline is appropriate.
Findings Of Fact Petitioner is the state agency with the statutory authority and duty to license and regulate insurance agents in Florida. Respondent holds license D033674 as a life and health insurance agent. At the time of the events which are the subject of this case, Respondent also held a license to sell securities. At the time of the events which are the subject of this case, Respondent was employed by First Liberty Group and sold life insurance, annuities, and viatical settlement purchase agreements ("viaticals"). A viatical is a written agreement which provides for an investor's purchase of an interest in the proceeds of a life insurance policy of an anonymous insured person, the "viator." The agreement provides for the amount of money that the investor will receive upon the death of the viator. One general principle underlying a viatical is that it provides a means for a terminally ill person who needs money to sell or assign the proceeds of a life insurance policy that would be paid upon his or her death. Another general principle is that the viator, due to the terminal illness, has been diagnosed to have a short life expectancy. Although the identity of the viator is not revealed to the investor, the investor is provided information about the viator's gender, age, illness, and life expectancy. Facts Common to All Counts A company that "viaticates" life insurance policies and arranges for diagnoses of life expectancies by medical doctors is called a "viatical settlement provider." For all the viaticals sold by Respondent, the viatical settlement provider was Mutual Benefits Corporation. Mutual Benefits Corporation was charged with and ultimately determined to have committed fraud with respect to its practices as a viatical settlement provider. The nature of the fraud was not made a part of the record in this case. Mutual Benefits Corporation was placed in a receivership to manage the remaining assets, liabilities, and contracts of the company. Respondent's employer, First Liberty Group, advertised that it offered a certificate of deposit (CD) at a very competitive annual interest rate. Potential customers who came in to inquire about or to purchase a CD were also informed about annuities and viaticals. Petitioner referred to this as a "bait and switch" technique. However, although the CD interest rate might have been the bait, there was no switch. Customers who wanted CDs were able to and did purchase CDs from First Liberty Group through Respondent at the advertised interest rate. Some customers also purchased annuities and viaticals. In the advertising materials provided to the investors by Respondent and in the Viatical Settlement Purchase Agreements signed by the investors, the amount the investors would receive upon the death of the insured is described as "fixed." For example, the return on an investment in a viaticated insurance policy for a viator with a three-year life expectancy was represented to be 42 percent. The 42 percent return was fixed in the sense that on an investment of $20,000, for example, the investor would receive 42 percent of $20,000, or $8,400, when the viator died. If the viator died six months after the purchase of the viatical, the investor would receive $8,400. If the viator died three years later, the investor would receive $8,400. If the viator died ten years later, the investor would receive $8,400. The viatical sales literature that Respondent gave to customers disclosed that the life expectancy of the viator, as determined by a doctor, was not guaranteed. Therefore, the amount of the return on the viatical investment was not fixed in the sense of an annual interest rate. In the examples given above, the annualized rate of return to the investor if the insured died six months later would be 84 percent (42 divided by .5 years). The annualized rate of return if the viator died three years later would be 14 percent (42 divided by 3 years). The annualized rate of return if the viator died ten years later would be 4.2 percent (42 divided by 10 years). Petitioner charged Respondent with not explaining to the investors that "the real rate of return on the investment was tied to the viator's date of death." However, Petitioner failed to prove this charge. Respondent did not tell the investors that the 42 percent return, for example, was an annual rate of return. The viatical sales materials provided to customers by Respondent did not describe the return on the investment as an annual rate of return. The effect that the date of the viator's death would have on the rate of return on the viatical is obvious. The sooner the viator died, the better the return; the later the viator died, the worse the return. The investors did not need specialized knowledge to understand this simple concept. No investor in this case said they did not understand that their return would be affected by when the viator died. None of the investors said they thought the "fixed rate" figure, such as 42 percent for a three-year viatical, was a guaranteed annual return. Each investor signed a Viatical Settlement Purchase Agreement that included a statement that the returns "are fixed and not annualized returns." (Emphasis in the original). Another factor affecting the actual return on a viatical investment is the possibility provided for under the terms of the viatical contract that the investor might have to pay a portion of the premiums on the life insurance policy in the event the viator lived longer than his or her life expectancy. Any payment of an insurance premium by the investor would cause a reduction in the return on the viatical investment. In the example given above, if the investor was required to pay $2,000 in premiums, his return on the $20,000 would no longer be $8,400, but only $6,400. The annualized return on the investment would be correspondingly reduced. In a worse case scenario, the possibility exists that the requirement to make premium payments could completely eliminate any potential return to the investor and even jeopardize the principal. The viatical advertising materials that Respondent provided to customers did not describe the possibility or impact of having to make premium payments as discussed above. The advertising materials generally downplayed the risks associated with a viatical. For example, one sales document described the viatical as appropriate for a conservative investor and suggested that viaticals are investments that provide "peace of mind." It was reasonable for Respondent and the sales materials to describe the insurance companies that issued the insurance policies as reliable and secure. However, it was not reasonable, nor accurate, to describe the viaticals as conservative investments because of the possibility that the insured person would live many years beyond his or her life expectancy and the possibility that the investor would have to make premium payments. Viaticals have the potential to provide a much better investment return than other types of investments. However, in conformance with the general rule that the higher the potential return on an investment, the greater the risk, the relatively high potential return on a viatical comes with a relatively high risk.1/ Respondent disclosed to the investors that there was a possibility they might have to make future premium payments, and it was described in paragraphs 20 and 21 of the Viatical Settlement Purchase Agreements signed by the investors under the heading "Payment of Future Premiums." The agreement states that the payment of insurance premiums beyond the life expectancy of the viator is at the discretion of Mutual Benefits Corporation. Respondent told the investors that Mutual Benefits Corporation had a reserve or escrow fund that was managed in a way that created a premium "pool" so that the early death of a viator provided a surplus of money that could be used to pay premiums on the insurance policies of viators who lived beyond their life expectancies. Respondent also told the investors that 85 percent of the viators died early, which created a large surplus in the escrow fund to pay future premiums. The viatical contracts, however, only stated that unused premiums "may" be retained in the reserve fund by Mutual Benefits Corporation. At some point after the investors involved in this case purchased viaticals from Respondent, Mutual Benefits Corporation was the subject of enforcement action for fraud and placed in receivership. There was evidently no longer a surplus or reserve fund to pay premiums on insurance policies associated with viators who lived beyond their life expectancy, and that burden fell on the investors. All the investors involved in this case told Respondent they were conservative investors with a low tolerance for risk. There is a commonality in their perceptions of viaticals derived from their discussions with Respondent, that viaticals were safe and conservative investments. However, viaticals are relatively risky investments due to their illiquidity and the fundamental conditions affecting the return and the security of the principal that are beyond the control of the investor. Respondent knew or should have known, through the exercise of reasonable diligence on behalf of the customers who purchased viaticals, that viaticals are relatively high-risk investments. Respondent misrepresented the risk character of viaticals in his discussions with the investors involved in this case. He had a motive to downplay the true risk character of the viaticals, because he received a commission for every sale of a viatical. If Respondent had informed the investors of the true risk character of viaticals, the investors might not have purchased the viaticals. The definition of "security" in Section 517.021, Florida Statutes, was amended in 2006 to specifically identify "viatical settlement investment" as a type of security. Respondent does not dispute that a viatical is a security. There is no dispute that the viaticals sold by Respondent, which are the subject of this case, were not registered securities when Respondent sold them in 2003. Count I - Simons Charles Simons was 81 years old in 2003. He has eight years of education. He used to work as a truck driver in a quarry associated with a cement plant, but is now retired. He owns real estate and has an annual income over $100,000 and a net worth of $600,000 to $700,000. Mr. Simons saw the CD advertised by First Liberty Group and came in with his wife to invest $100,000 he had acquired from the recent sale of real estate. They met with Respondent in July 2003. Mr. and Mrs. Simons invested $50,000 in two or more CDs and an annuity. They also purchased two viaticals for $50,000. Mr. and Mrs. Simons purchased two three-year viaticals, meaning that medical doctors who had purportedly examined the medical records of the insured persons expected them to die of their terminal illnesses within three years. The Simons invested $25,000 in each of the viaticals. Although four years have passed since the Simons purchased the three-year viaticals, neither of the insured persons has died. Mr. Simons has had to make a premium payment of approximately $2,000 on one of the underlying policies.2/ Count II – Lenois Allan Lenois was 70 years old in 2003. He is a high school graduate, studied accounting and taxation, and worked for a lumber company where he supervised 300 employees. His wife, Marion, was an accountant. They are now retired. In August 2003, Mr. and Mrs. Lenois went to see Respondent after seeing the CD advertisement in the newspaper. While in Respondent's office, they noticed a poster advertisement on the office wall about viaticals and asked Respondent about them. Mr. Lenois' deposition testimony that Respondent called the viaticals "guaranteed" is not persuasive, given Respondent's testimony at the final hearing that he used these kinds of words to describe the industry rating of the insurance companies involved and the federal-insured reserve fund account, not the viatical itself. However, as previously found, Respondent misrepresented the viaticals to be relatively conservative investments to all the investors. Mr. and Mrs. Lenois invested $20,000 in an annuity. In a deposition of Mr. Lenois, he stated that he thought he had purchased a CD from Respondent, not an annuity, and was surprised that he had to pay a surrender penalty. Petitioner makes this same allegation in its Proposed Recommended Order, but Mr. Lenois' testimony is not persuasive because he signed a disclosure document that states "I understand that I have purchased an annuity . . . and not a Bank Certificate of Deposit," and the word "annuity" is written on the personal check used to purchase the annuity. Furthermore, the allegation was not included in the Administrative Complaint. Mr. and Mrs. Lenois purchased one three-year viatical for $10,000. Although four years have passed since they purchased the viatical, the viator is still alive. Mr. and Ms. Lenois have not yet had to make a premium payment associated with their viatical. Count II – Luenberger Floy Leuenberger is a retired school teacher. She has a master's degree in counseling and education. Her husband is a retired bank employee. The Leuenbergers have a net worth just over $500,000. The Leuenbergers saw the CD advertised by First Liberty Group and came in to invest $75,000. They met with Respondent in October 2003. They saw a poster on the wall of Respondent's office about viaticals and asked Respondent about them. The Leuenbergers invested $50,000 in CDs and purchased two viaticals for $12,500 each. One of the viaticals purchased by the Leuenbergers "paid out" because the viator died, and they received the return Respondent quoted to them. The other viatical they purchased from Respondent has not yet paid out. The Leuenbergers have had to make a premium payment of approximately $1,500 on the remaining viatical. Count III – Berge Oscar Berge is retired from the United States Air Force and from a subsequent job as a maintenance supervisor for a health care facility. Mr. Berge obtained a college degree in avionics instrument technology while in the Air Force. Mr. Berge saw the CD advertised by First Liberty Group. He and his wife met with Respondent in late 2002 and, in January 2003, invested in two annuities and five viaticals. Mr. and Mrs. Berge purchased two three-year viaticals for $30,000 each and three five-year viaticals for $30,000 each; a total investment of $150,000. Although four years have passed since the Berges purchased the three-year viaticals, the two viators have not died. The Berges have had to make two premium payments totaling approximately $5,000.
Recommendation Based on the Findings of Fact and Conclusions of Law set forth above, it is RECOMMENDED that a final order be entered which finds that Respondent Bradley Kline violated Subsections 626.611(5), (7), (9), and (16) and 626.621(9), Florida Statutes, and revokes his license as an insurance agent. DONE AND ENTERED this 9th day of October, 2007, in Tallahassee, Leon County, Florida. S BRAM D. E. CANTER Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 9th day of October, 2007.
Findings Of Fact C & W Sales, Inc., was licensed as a dealer in agricultural products under license No. 1367 and was so licensed at all times here relevant. At the time of the incorporation of C & W Sales, Inc., Henry T. Watson was listed as an officer (President) and director of the company. The company was run by Philip A. Roberts, the brother-in-law of Watson. Roberts applied on behalf of C & W Sales, Inc., to FFB for an agriculture bond in the amount of $20,000 for the period 5/19/79 until 5/19/80 (Exhibit 1) . As a condition for issuing this bond FFB required and obtained a general agreement of indemnity from Roberts and Watson and their wives (Exhibit 2) which was executed on 2 May 1979. In addition to agreeing to save Florida Farm Bureau harmless from all claims arising out of the bond paragraph 14 provided: That this indemnity is continuing and will apply to any and all bonds, as provided in the opening paragraph of this Agreement which the Company may have executed or procured the execution of from time to time, and over an indefinite period of years; however, any Indemnitor may by written notice to the Company at its Home Office, Gainesville, Florida disavow his liability as to bond(s) which may be executed by the Company subsequent to fifteen days after receipt by the Company of such notice. Agriculture bond (Exhibit 4) was issued on 5/19/79 for one year and upon expiration on 5/19/80 the bond was renewed for an additional period of one year (Exhibit 5). Subsequent to the expiration of the 1979-80 bond (Exhibit 4) and reissuance of the 1980-81 bond (Exhibit 5) but within the prescribed time for submitting a claim against the agriculture dealer and his bond, John T. Brantley, Jr., filed a claim against C & W Sales in the amount of $8,317.05 for payment owed on a transaction which occurred during the 1979-80 period. When C & W Sales failed to pay or respond to the Commissioner of Agriculture's demands for payment, claim was made on the 1979-80 bond and FFB remitted to the Commissioner of Agriculture a check for the Brantley claim (Exhibit 6). Around February 1980 Watson became disenchanted with Roberts' running of C & W Sales, Inc. and wanted out. He told Roberts to get someone to buy his (Watson) stock and to get his name out of the company. Roberts said he would. Watson never advised FFB that he would no longer be an indemnitor under the bond. During the period covered by the bond year beginning 5/19/80 claims against C & W Sales, Inc., were submitted to the Commissioner of Agriculture by Henry L. Watson in the amount of $32,326.50; Hugh D. Martin in the amount of $1,932.80; Jesse J. Wilson in the amount of $1,490.00; John T. Brantley, Jr., in the amount of $15,024.40; and Philip Dean and Willie Bass in the amount of $4,919.13, for a total of $55,692.83. The Commissioner of Agriculture notified C & W Sales of these claims and advised them of the opportunity to contest the validity of the claims. No response was received from C & W Sales and Roberts appears to have departed the area to parts unknown. An order demanding payment was submitted to C & W Sales and when payment of these claims was not made, FFB, as surety on the bond, was notified by the department of its surety on the bond, was notified by the department of its obligation under the bond and a demand for payment of $20,000 to the department was made. There is no dispute regarding the accuracy or validly of the claims against C & W Sales contained in Finding 7 above. Nor does FFB contest its liability under the agriculture bond it issued for the 1980-81 bond year. However, FFB claimed an equitable setoff for the percentage of the $20,000 that would go to Watson. This setoff is claimed by virtue of Watson's indemnity agreement. By the stipulation the parties have agreed that the FFB is entitled to the pro rata share of the $20,000 to Watson.
