But ex-broker refutes claim, says clients performed their own due diligence
A Florida law firm has filed a Finra arbitration claim against a broker-dealer, alleging that one of its former reps inappropriately had sold life settlement investments to a retired couple.
Tramont Guerra & Nunez PA claims that Bradford H. Blazar, formerly a registered representative with RIM Securities Ltd., solicited an elderly couple — now 77 and 88 — into investing their entire individual retirement account into a portfolio of investment interests in life settlements. The account had $450,000 at the time.
Life settlements involve an insured individual's sale of his or her life insurance policy to an investor for cash upfront. Meanwhile, the investor makes the premium payments to keep the policy in force and ultimately collects on the death benefit.
In the complaint, the law firm alleges that Mr. Blazar met the elderly couple in 2004 at a retirement planning seminar at a Ruth's Chris steakhouse. Once the investors became clients, the broker began soliciting them to invest their $450,000 IRA into fractional interests in a series of different life settlement contracts arranged through Life Partners Holdings Inc., according to the arbitration claim.
The investment also allegedly required the couple to surrender an annuity.
According to the complaint, the couple had difficulties making required minimum distributions from their IRA, as it was tied up in illiquid life settlement investments
Further, the complaint alleges that Mr. Blazar and the firm failed to disclose to the clients the risks tied to investing in life settlements — namely, that an investor can end up paying premiums on the policy for a very long time if an insured person lives longer than expected.
The arbitration claim asserts that Life Partners “systematically underestimated the life expectancy, which artificially raised the expected return and the price paid for life settlement contracts.”
Currently, Life Partners and a trio of its executives are facing fraud charges from the Securities and Exchange Commission for allegedly failing to disclose that they were underestimating the life expectancies of insured policyholders — a major factor in determining the price of a policy and the amount the firm makes from its sales. Life Partners disputes the SEC's accusations and said it will “vigorously defend itself and its officers.”
Due to the purportedly inaccurate life expectancy estimates, the elderly clients were shelling out payments and funneling them into their IRA in order to maintain the policies they had invested in, according to the clients' law firm.
“These clients had to make payments into the IRA in order to keep the policies afloat,” said Stephen Ostrofsky, securities arbitration consultant for Tramont Guerra & Nunez. “These aren't investments that should be targeted toward retirees. Let the hedge funds invest in these.”
Mr. Blazar, who is not affiliated with any broker-dealer at the moment, refutes the couple's allegations.
He said his relationship with the clients goes back to 2004 when he was affiliated with SunAmerica Securities Inc. and continued after he joined RIM in 2005.
He said that RIM terminated him Jan. 13, 2006, and the broker-dealer sent the U-5 paperwork to the Financial Industry Regulatory Authority Inc. within 30 days. As a result, his BrokerCheck record indicates that he was with the firm until February 2006.
After Mr. Blazar left RIM, the couple approached the former rep, saying they were concerned about the economy and stock markets, and that they didn't want to lose principal, the former broker said.
This was when Mr. Blazar said he brought up Life Partners.
“I said, ‘I like what they're doing, because [life settlements] are not correlated and aren't affected by interest rates,” Mr. Blazar recalled. “I said, ‘They have open houses, and you can visit with Brian Pardo [Life Partners' CEO] and have your questions answered.'”
After supposedly spending half a day at Life Partners' offices, the clients were interested in making an investment, Mr. Blazar said.
He said he helped the clients complete their paperwork and submitted it to Life Partners. “All I did was facilitate the paperwork on their behalf, but they weren't relying on me to make a recommendation,” Mr. Blazar said. “They did their own due diligence.”
The former rep also disputes the clients' account that the investment was unsuitable for a retirement account. He claimed the clients, in fact, made money from their investments into other people's life insurance policies.
“They put $30,000 into one policy that paid out $52,600 over five years,” Mr. Blazar said. “They should be jumping for joy, knowing their investment isn't tied to the market, to get these kinds of yields.”
In response to the former rep's account of the events, Mr. Ostrofsky said the law firm “is very comfortable with having named Rim and Mr. Blazar.”
“It's very possible that he was selling away, but RIM doesn't avoid its responsibility to supervise him,” he said.
Barbara Matin Hawkesworth, chief compliance officer at RIM, had no comment. Attempts to reach R. Scott Peden, general counsel of Life Partners, were not successful.
Plaintiff's attorneys expect to see more arbitration cases against broker-dealers that may have offered life settlement investments to their clients.
“Life settlements have been a popular topic of conversation at the plaintiff's bar, and I expect there to be a tsunami of claims,” said plaintiff's attorney Andrew Stoltmann. “Anytime you have a massive meltdown in an illiquid investment that pays out a large commission to the broker — and you know brokers have been jamming a square peg in a round hole, especially to elderly folks — you can be certain you're going to see claims related to the products.”
In January, Finra barred one rep for selling bonded-life-settlement securities and participating in private-securities transactions despite his broker-dealer's denying him permission to do so. Two other reps were fined and suspended for failure to report outside business activities involving life settlements, according to the organization's January 2012 disciplinary-actions report.
