Citing “paper-thin compliance,” Secretary of the Commonwealth of Massachusetts William Galvin on Thursday charged LPL Financial with a failure to supervise a top-producing broker who allegedly committed fraud in selling unsuitable variable annuities to retirees.
The broker, Roger Zullo, “for years has defrauded his clients, lied to his supervisors, and fabricated client financial suitability profiles, in order to enrich himself and LPL by selling scores of identical, illiquid and high-commission variable annuities,”
the complaint stated. Some of Mr. Zullo's transactions left older clients cut off from their money for years, the complaint alleged.
Mr. Galvin's complaint painted compliance culture at LPL, the largest independent broker-dealer in the country, in a particularly harsh light and is a sharp rebuke to a firm whose chief executive, Mark Casady, has consistently said over the past few years that it was working diligently to put compliance failures and problems in its rear view mirror. In 2014 and 2015, LPL paid more than $70 million in regulatory fines and restitution to clients.
The allegations in the complaint point to "LPL's total failure to protect its customers from the prolonged and systematic fraud perpetrated by one of its major producers. LPL failed to supervise [Mr.] Zullo's annuity sales in numerous ways. Moreover, LPL was presented with countless opportunities to take corrective or investigative action, and repeatedly failed to do so. Instead, LPL turned a blind eye to the fraudulent activities of one of its top annuity salesman.”
LPL'S RESPONSE
The complaint, which focuses on 11 of Mr. Zullo's clients, calls for LPL to retain an independent third party investigator to probe the broker's annuity sales and recommend improvements in LPL's supervision and procedures.
“We are reviewing the matter and hope to work with the
Massachusetts Securities Division to reach a full resolution," LPL spokesman Jeff Mochal said. “We take our responsibility to supervise very seriously and are committed to serving our investors."
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Mr. Zullo, who focused on health care workers and was a member of LPL's chairman's club for top annuity salesman, “bypassed LPL's paper-thin compliance review process for these sales by fabricating client suitability information, such as age and liquid net worth,” according to the complaint.
"LPL was presented with countless opportunities to take corrective or investigative action, and repeatedly failed to do so. Instead, LPL turned a blind eye to the fraudulent activities of one of its top annuity salesman."
-- Secretary of the Commonwealth of Massachusetts William Galvin's complaint
LPL “actively disregarded and denied” warning signs and red flags about the broker, along with “deliberate and specific supervisory attempts to escalate concerns with [Mr.] Zullo's sales practices, as well as a written complaint made on behalf of a cognitively impaired senior citizen that affirmatively identified [Mr.] Zullo's fraud,”
according to the complaint.
Over three years, LPL and Mr. Zullo, who at least on one occasion allegedly met a client in a subway station near his office to sign paperwork for a switch into a new VA, received more than $1.8 million in variable annuity commissions. One product, the Polaris Platinum III (B Shares) VA, accounted for the overwhelming amount of those commissions.
The Polaris Platinum annuity paid a 7% commission, with Mr. Zullo receiving 90% of that and LPL keeping the rest. In many instances, clients had to pay surrender charges when Mr. Zullo persuaded them to switch to the Polaris Platinum annuity, according to the complaint.
To underscore the weak oversight at LPL, Mr. Galvin's complaint cited an internal communication from Mr. Zullo's supervisor, who inquired about Mr. Zullo's uniform annuity sales in April 2014. “It did very much seem to me that he had a pattern of switching everybody out of their annuities every six or seven years and that he was getting commissions over and over again from the same clients,” the supervisor wrote, according to the complaint.
CONCERNS IGNORED?
Separately, Mr. Zullo's supervisor told LPL managers and other supervisors that “I have concerns about his business,” and “I think this issue needs to be escalated,” according to the complaint.
“LPL effectively ignored the oft-stated concerns of Zullo's direct supervisor,” the complaint alleged.
(See:
The latest Massachusetts complaint against LPL Financial )
According to his BrokerCheck report, Mr. Zullo has been registered with LPL since 2004 and has no “disclosure events” such as past regulatory matters or legal issues in his employment profile. He did not return calls to his office on Thursday morning to comment.
“Betrayal of the trust of investors, especially older investors, retirees and those in the health care industry, is unconscionable behavior on the part of an investment adviser, and will not be tolerated,” Mr. Galvin said in a press release. “And this office will not accept a company's abdication of its oversight responsibilities while the commissions accumulate.”
OLD FOES
Mr. Galvin and LPL are old foes;
four years ago, he charged LPL with failing to supervise registered reps who sold nontraded real estate investment trusts in violation of both state limitations and the company's rules. The Massachusetts Securities Division also charged LPL with dishonest and unethical business practices. The two sides quickly settled the matter, with LPL two months later agreeing to pay at least $2 million in restitution and $500,000 in fines.
Mr. Galvin's investigations into LPL also led to a $1.4 million fine and settlement in 2015 with 50 state securities divisions over the firm's failure to implement an adequate supervisory system regarding its sale of nontraded REITs and its failure to enforce its written procedures regarding the sale of nontraded REITs.
(Related read: Advisers failing to comprehend impact of DOL fiduciary rule: Massachusetts regulator William Galvin)
Like nontraded REITs, sales of variable annuities are typically not automated and require extensive paperwork to be completed by the broker and client in order to finish the transaction. Critics claim that lack of automation creates room for errors in selling such products and greater difficulty for oversight by a broker-dealer's home office. And both nontraded REITs and VAs are products that pay the selling broker high commissions in a time when the retail securities industry is moving toward standard fees and a fiduciary standard.
