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SEC Files Fraud Charges Against Registered Representatives in Connection with Investments by Federal Employees in Variable Annuities

On July 31, 2017, the SEC filed a complaint alleging that four former registered representatives (the Registered Reps) of Keystone Capital Partners, Inc., a broker-dealer that did business under the name “Federal Employee Benefit Counselors,” fraudulently induced federal employees to roll over significant funds from their federal Thrift Savings Plan (TSP) retirement accounts into privately issued higher-fee variable annuity products that the Registered Reps misled the federal employees into believing were affiliated with or approved by the federal government.  The SEC complaint was filed in U.S. District Court, rather than as an administrative action, and sought permanent injunctions, disgorgement of ill-gotten gains, and civil penalties.  

The SEC alleged that the Registered Reps sold approximately 200 variable annuities with a total face value of over approximately $40 million to federal employees using monies rolled over from their TSP accounts, earning the Registered Reps approximately $1.7 million in commissions on these sales.  The SEC’s complaint states that the Registered Reps targeted federal employees nearing retirement (age 59½ and over), with sizable funds invested in TSP accounts, and created the false impression that they were affiliated with, or approved by, the federal government.  According to the complaint, the Registered Reps generated “TSP Reports” that did not disclose that the recommended investment option was actually a variable annuity (or that this “option” involved investing with a third party that has no government affiliation).  The TSP Reports also allegedly failed to disclose the variable annuity costs, such as mortality and expense risk charge and guaranteed minimum withdrawal benefit rider fees or the surrender charge, although both liquidity and longevity protection were touted.  Finally, the complaint charges that the defendants misleadingly obscured the difference between the annuity’s cash value and the rider’s benefit base.  

The Registered Reps were also charged with failing to timely deliver the variable annuity prospectuses to investors.  The complaint claims that the Registered Reps “knowingly disregarded,” and acted contrary to, certain of the broker-dealer’s compliance procedures, and that they falsely reported through the broker-dealer’s systems that they had sent the prospectus to customers.   In addition, the Registered Reps allegedly used customer signatures from executed documents to falsify signatures on documents that the customers never received.  

The complaint charges the Registered Reps and “Federal Employee Benefits Counselors” with violating and aiding and abetting violations of the anti-fraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, among other things.  

In conjunction with this action by the SEC, the SEC’s Office of Investor Education and Advocacy (OIEA) and BrokerDealer Task Force issued an Investor Alert on July 31, 2017, warning the more than 5 million TSP participants and investors in other federal government employee retirement plans, that fraudsters may target federal employees and pretend to be affiliated with a government agency.

The Investor Alert is available at: https://investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alertfraudsters-may-target-federal.

© 2017 Vedder Price

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Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...

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