Banned from selling securities but still hawking insurance

The Securities and Exchange Commission earlier this week barred three salesmen who worked at firms with the homiest of monikers: Balanced Financial Inc., Live Abundant and Old Security Financial Group.

More than a year ago, the SEC charged all three with selling a Ponzi scheme.

What’s not so balanced, abundant or secure is the fate of the investments clients bought, namely the Woodbridge Ponzi scheme investments, from the advisers who worked at the three firms listed above: Gregory W. Anderson, Aaron R. Andrew and Robert S. “Lute” Davis, respectively.

What’s even more out of whack is that all three salesmen, although they've been barred by the SEC, retain licenses in their respective states to sell insurance products to clients, according to the insurance agency websites of the states in which they work.

Mr. Anderson and Mr. Andrew work in Colorado and Utah, respectively, while Mr. Davis is based in Texas. They each made between $776,000 and $2 million in commissions from selling the Woodbridge Ponzi scheme, according to the SEC.

This column in the past has focused on the confusing nature of the various regulatory regimes under which financial advisers work. Among the most vexing issues facing the financial advice industry is that of advisers who are restricted or barred from selling securities, but continue to have a license to sell insurance.

“There’s a hole in the regulatory infrastructure that you can drive a Mack Truck through, and the insurance industry seems to be paralyzed with respect to doing anything about it,” said Andrew Stoltmann, an attorney and former president of the Public Investors Arbitration Bar Association. “There is nothing more material for a client to know than whether the person they are dealing with has been barred from the securities industry.”

Let’s focus for a moment on the Woodbridge Ponzi. The scam ran from July 2012 until December 2017, when the Woodbridge Group of Companies, which claimed to invest in and develop luxury real estate, filed for Chapter 11 bankruptcy protection.

Robert Shapiro, the former CEO of Woodbridge Group of Companies, pleaded guilty over the summer to running a $1.3 billion fraud that caused more than 7,000 investors to lose money, according to prosecutors.

Woodbridge built a network of hundreds of insurance agents and brokers, some with checkered careers in the securities industry, to sell the notes, which supposedly were backed by mortgages.

The SEC sued Mr. Anderson, Mr. Andrew and Mr. Davis in December 2018, a year after Woodbridge collapsed.

Mr. Anderson declined to comment, while Mr. Andrew and Mr. Davis did not return calls to comment.

Regulators appear to be slowly, ever so slowly, becoming more aware of the issue but they are not moving fast enough to protect investors adequately. InvestmentNews has focused on this for years.

For example, last fall the National Association of Insurance Commissioners and the Financial Industry Regulatory Authority Inc. reportedly finalized a memorandum of understanding on sharing information to enhance state insurance regulators’ awareness of actions Finra has taken against security brokers who operate in the insurance industry.

The data sharing is also supposed to improve Finra's knowledge of actions state insurance regulators have taken against insurance producers who also operate in the securities industry.  

I asked Alana LaFlore, a spokewoman for the NAIC, for a copy of the memo but had not received it by Tuesday afternoon.

The issue is more pressing because fraudsters like those who ran Woodbridge are turning to a simple, effective strategy to sell faulty products and rip off investors: Instead of distributing these products through reps and broker-dealers, which are regulated by the SEC, the states and the Financial Industry Regulatory Authority Inc., con artists like Mr. Shapiro are relying on networks of insurance agents or former brokers to sell their lousy investments.

In other words, the perpetuation of investment frauds has evolved in the decade since the credit crisis, but the role of the various regulators has not, regardless of how many memos of understanding are passed between bureaucrats at regulatory agencies.

An individual who is barred from operating in the securities industry is required to disclose this on his application for an insurance license. Such individuals also lose the ability to sell variable annuities, which are defined as securities and not insurance products.

That is the minimum to be expected. Advisers who have been barred from the securities industry but retain licenses to sell insurance are not required, to my knowledge, to disclose the ban on business websites or state insurance agency websites.

Why aren't the various regulatory agencies putting their heads together to ensure that public disclosure of advisers who are banned is made more simple and fair? Shouldn’t some kind of public or broad disclosure be posted by the insurance agent or the industry if someone has been kicked out of the securities side of the business?

The public still remains skeptical of the financial advice industry and advisers as a result of the disaster of the 2008 financial crisis. The lack of transparency around insurance agents who have been booted from the securities side of the financial advice industry is appalling.