Securities Fraud: Annuity Switching

There presently exists and epidemic of abuse by certain financial sales persons who switch their customers into unsuitable variable annuities in order to reap considerable commissions. This problem has been widely reported in the media and acknowledged by the Financial Industry Regulator Authority (FINRA). See e.g. Variable Annuities Cases vs. Brokers Surge in Arbitration, Wall Street Journal, January 8, 2014 (“Variable annuities remain “very much a focus,” FINRA Chairman and Chief Executive Richard Ketchum said in an interview last week. “Annuities continue to get more complex” and the risks in selling them to senior investors remain substantial, he added.”) See also FINRA investor alert Should You Exchange your Variable Annuity, December 2011, providing the following “Alert”: “Variable annuity sales have dropped along with the decline of the equity marketplace. A recommendation for the exchange of an existing annuity contract for a new annuity contract may be the only way a sales person can generate additional business.” [emphasis added].


Misconduct in annuity switching has also been the source of numerous enforcement actions as of late. A few examples among many include: In re Raymond A. Parkings, Jr., (SEC Release No. 33-8055 (January 18, 2002)), Securities and Exchange Commission v. Gregory P. Waldon, (No.S-0201395 (E.D. Cal.), In the Matter of Gregory P. Waldon, Exchange Act Release NO. 48419 (August 29, 2003), In the Matter of Donna N. Morehead, (Exchange Act Release No. 46121 (June 26, 2002), Kevin S. Jones, (NASD Case Number C05030015 (May 27, 2003)(The customer, a self-employed rancher, needed access to her funds and had an investment time horizon of two to seven years. During the sixth year of her ownership of a $300,000 variable annuity, Jones recommended that she switch to another variable annuity in the amount of $315,000, for which Jones received a commission of $8500. The original variable annuity would have allowed the customer penalty-free access to her money in eight months, but the switch resulted in limited access to her investment for the next nine years.)

Financial sales persons are motivated to recommend these fraudulent switches in light of the high commissions (as high as Ten Percent (10%)) offered by some annuity companies. Sadly, it is difficult for the aggrieved investor to know whether, and if so to what extent, they have been defrauded due to the complexity of annuity contracts. If one suspects that they, or a loved one, are the victims of an annuity switch, they should immediately contact an experienced investment fraud attorney.