We are currently investigating possible securities fraud claims involving the following investments or type of investments:

(1) Investments in DBSI, Inc. or DBSI TICs (tenants in common), particularly those solicited by Royal Alliance, Independent Financial Group, and Questar
(2) ING variable annuities and ING’s variable annuity sales practices
(3) Ameritas and Pacific Life variable annuity and life insurance sales practices
(4) UBS proprietary products and mutual funds sales practices
(5) Investments in Citigroup structured products such as ELKS
(6) Investments in Medical Capital, particularly those solicited by Securities America
(7) Morgan Stanley active trading practices (and possible churning), as well as margin investing
(8) RBC Capital (f/k/a RBC Dain Rauscher) suitability standards for elderly investors
(9) Investments in emerging markets (in particular Chinese companies) solicited by Brookstone Securities
(10) Raymond James’ variable annuity sales practices
(11) Morgan Keegan funds
(12) Lehman Brothers’ 100% principal protected promissory notes

If you have any information that may assist us in our current investigations, on if you believe that you have been the victim of a securities fraud, please contact our offices at either 561-238-9650 or 561-961-5411. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions. For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

In an order, the SEC found that from approximately November 1999 through February 2007, Prime Capital Services, a broker-dealer that Gilman Ciocia acquired in 1999, offered and sold variable annuities that were unsuitable investments for elderly customers due to the customers’ ages, liquidity and investment objectives.

The order also found that Gilman Ciocia aided and abetted the broker-dealer’s fraud by arranging and marketing free-lunch seminars in the South Florida area at which Prime Capital Services registered representatives recruited elderly customers whom they later induced to buy variable annuities. The SEC further found that Prime Capital Services failed to implement the firm’s supervisory procedures in a way that reasonably could be expected to detect and prevent the registered representatives’ violations of federal securities laws.

The SEC issued an order censuring both Prime Capital Services and Gilman Ciocia, and ordered them to cease and desist from violating securities laws. Prime Capital Services was also ordered to disgorge $97,389.05, plus $46,873.53 in prejudgment interest, while Gilman Ciocia was ordered to pay a civil monetary penalty of $450,000 to be paid in three installments.

In addition, Prime Capital Services and Gilman Ciocia have agreed to take several steps, including hiring an independent compliance consultant to review and recommend changes to Prime Capital Services’s supervisory procedures; restricting some representatives from involvement in variable annuity sales until the independent compliance consultant has completed its review; refunding the variable annuity fees incurred by certain elderly customers of particular registered representatives; and giving notice of the settlement to elderly customers who bought variable annuities from particular registered representatives in the past five years.

Prime Capital Services and Gilman Ciocia consented to the issuance of the order without admitting or denying any of the findings.

According to Prime Capital Services’ FINRA Broker Report (CRD), the SEC investigation is not the first time that the firm has been named in a securities related investigation. In fact, it appears that the firm has been named in at least 6 regulatory investigations and 7 customer complaints.

If you have questions regarding investments you made with Prime Capital Services or Gilman Ciocia, or if you believe that you have been the victim of a securities fraud, The White Law Group may be able to help. The White Law Group is a national securities fraud, securities arbitration and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida. The firm has over 30 years of experience in securities litigation matters and handles matters throughout the country and Florida, including reviewing securities fraud cases in Boca Raton, Delray Beach, Boynton Beach, Lake Worth, Palm Beach, Wellington, Jupiter, Stuart, and Vero Beach. To contact the firm, please call 561-961-5411. Or, for more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

The most popular variable annuity contract is the “B” share annuity contract. This contract has an average M&E (mortality and expense plus administration fees) of 1.35%. That is what is called the base charge of the contract. There are additional costs for sub-account expenses and additional rider costs. The total fee for a “B” share variable annuity is about 2.7% a year.
The M&E expense (mortality and expense plus administration fees) generally covers the commission paid to the adviser and other general expenses from administering the variable annuity contract. In general the B share annuity has a seven year surrender schedule and other standard features. The typical commission on a “B” share variable annuity contract is 6.5% all upfront with little or no trailing commissions to the adviser.
Because the annuity industry recognized that they could attract more producers/financial advisors to sell their product by offering a product that had a decent upfront commission and paid out a generous trailing commission they developed a hybrid variable annuity contract called the “L” share. This L share variable annuity contract has a shortened surrender schedule, usually 3 to 5 years, and has a significantly higher M&E (mortality and expense plus administration fees) cost averaging 1.65% a year. Generally an L share variable annuity pays the adviser a 3-5% upfront commission with a .75-1% trailing commission paid out in either the 13th month or after the surrender schedule expires. This is why the M&E cost is much higher with an L share versus a B share variable annuity contract.

Many financial advisors prefer the L share variable annuity option and recommend it to their client because it has a higher trailing commission (which acts as a virtual annuity of income for the financial advisor because of the trail commission). This is reflected in the variable annuity sales data which shows the L share annuity contracts have quickly become as popular with financial advisors as the B share contract.

While an L share variable annuity contract is great for the financial adviser, it is not good for most annuity buyers. If the annuity buyer is seeking a short-term investment within a variable annuity contract than this option is OK, but since variable annuities, or any equity investment, is considered a long-term investment it makes little sense for the annuity buyer.

Since this market is an adviser driven market many consumers do not understand that they may receive a better deal if they look at the B share variable annuity contract instead of the L share.

If you have questions about a variable annuity investment you made, or if you believe that you have been the victim of a securities fraud, the Law Offices of David A. Carter, P.A. may be able to help. The Law Offices of David A. Carter, P.A. is a South Florida securities fraud, securities arbitration, investor protection, and Chapter 7 bankruptcy law firm based in Boca Raton. David Carter is a securities attorney that reviews securities fraud cases throughout the country and Florida, including securities fraud cases in Vero Beach, Melbourne, Daytona Beach, Okeechobee, Gainesville, Orlando, and Ocala. To contact the Law Offices of David A. Carter, P.A., please call 561-750-6999, or email us at contact@carterpa.com. For more information about the Law Offices of David A. Carter, P.A., you can also visit our website at www.carterpa.com.

In addition to the fine, FINRA ordered Fifth Third Securities to pay more than $260,000 in restitution to 74 customers/investors to compensate them for surrender charges incurred in the unsuitable transactions. The firm must also offer all 197 customers the opportunity to rescind their unsuitable transactions and receive the initial value of their purchase plus interest and any surrender charges required, adjusted for any withdrawals made.

FINRA found that between January 2004 and December 2006, Fifth Third Securities effected 250 unsuitable VA exchanges or transactions through 42 brokers, who, in many cases, worked in Fifth Third Bank branches. They used lists provided by the bank of customers with maturing CDs and referrals from bank employees to identify new customers — some of them elderly and/or unsophisticated and with conservative investment objectives — to purchase variable annuities.

One broker had 74 customers enter into 118 unsuitable exchanges shortly after he joined Fifth Third Securities in early 2005. To avoid leaving substantial customer assets at his prior firm, he switched his customers into variable annuities issued by the same insurance company with the same riders. In recommending these cookie cutter transactions, the broker ignored substantial differences in his customers’ ages, incomes, investment objectives and investment sophistication. The customers paid, in aggregate, at least $260,000 in charges to surrender their old annuities and were locked into essentially identical variable annuities that were more expensive and had new surrender periods. Obviously, the implication is that these annuity exchanges were purely motivated by the commission generated for the broker.

The commissions earned on these transactions enabled the broker to win a firm sales contest and he and his supervisors were each awarded a 42″ flat screen TV. The settlement announced today requires Fifth Third Securities to reimburse the broker’s customers for these surrender charges.

FINRA found that Fifth Third Securities knew the broker was engaging in a mass switch and approved each of the broker’s transactions, failing to adequately respond to red flags indicating that the exchanges were unsuitable.

FINRA also found that 41 other Fifth Third Securities brokers recommended and effected 132 unsuitable variable annuity purchases for 123 customers. These customers used cash from CDs or bank accounts to purchase the same variable annuity and they put their entire investments into the fixed rate sub-account of the variable annuity. Many of these customers were elderly and/or possessed limited financial sophistication, and had conservative investment objectives. FINRA found these identical transactions, in which customers traded liquid assets for a variable annuity with a seven-year surrender period and annual fees, to be unsuitable given the customers’ financial situations, needs, and investment objectives.

As part of the settlement, FINRA is requiring the firm to retain an independent consultant to review the adequacy of and recommend modifications to the firm’s supervisory system and procedures and training relating to variable annuity transactions.

If you have questions about investments you made with Fifth Third Securities or in a variable annuity, or if you believe that you have been the victim of a securities fraud, the Law Offices of David A. Carter, P.A. may be able to help. The Law Offices of David A. Carter, P.A. is a South Florida securities fraud, securities arbitration, investor protection, and Chapter 7 bankruptcy law firm based in Boca Raton. David Carter is a securities attorney that reviews securities fraud cases throughout the country and Florida, including securities fraud cases in Delray Beach, Boynton Beach, West Palm Beach, Jupiter, Wellington, Lake Worth, Riviera Beach, Stuart, Palm Beach Gardens, Gulfstream and Highland Beach. To contact the Law Offices of David A. Carter, P.A., please call 561-750-6999, or email us at contact@carterpa.com. For more information about the Law Offices of David A. Carter, P.A., you can also visit our website at www.carterpa.com.

Brokers at each of the firms operated out of branches of affiliated banks, selling VAs, mutual funds or UITs to bank customers (investors), who, in many instances, were elderly. The brokerage customers were referred by bank personnel, and sales of these financial products represented a significant portion of each firm’s business.

The five firms that FINRA fined for deficient systems and procedures relating to VA, mutual fund or UIT sales, and the amount of their fines, are:
• McDonald Investments (now KeyBanc Capital Markets, Inc.) – $425,000
• IFMG Securities – $450,000
• Wells Fargo Investments, LLC – $275,000
• PNC Investments – $250,000
• WM Financial Services, Inc. (now Chase Investment Services Corp.) – $250,000

McDonald Investments, now KeyBanc Capital Markets, also was charged with unsuitable variable annuity sales to elderly customers.

In the case against McDonald, FINRA found that, between June 2004 and January 2006, a former broker at the firm made 32 unsuitable sales to 25 elderly bank customers, recommending each customer purchase a VA with an enhanced death benefit rider. The customers, all 78 years old or older, were either too old to be eligible for the rider, or very close to the ineligible age. Those customers who purchased the VA with the enhanced death benefit rider received little or no benefit from the rider despite paying higher fees for it over the life of the annuity.

FINRA ordered the firm to offer the 25 affected customers the opportunity to rescind their unsuitable transactions and receive the initial value of their purchase, plus interest and any surrender charges required, adjusted for any withdrawals made.

FINRA also found that McDonald failed to take adequate remedial steps in response to red flags indicating that the broker was engaging in unsuitable VA transactions, including nine customer complaints filed against the broker about her annuity sales, and the broker’s practice of consistently engaging in a pattern of selling elderly bank customers the same variable annuity with the same enhanced death benefit rider.

The firm placed the broker under heightened supervision, but while under heightened supervision, the broker undertook all 32 unsuitable transactions and the firm approved them. FINRA also found that McDonald failed to implement adequate VA supervisory systems and procedures.

As for IFMG Securities, FINRA found that the firm used trade blotters to assess suitability and approve VA and mutual fund transactions that did not capture key information, such as the customer’s investment time horizon, risk tolerance and other financial assets – all details that are necessary for the principal to conduct an adequate suitability review. Also, important suitability information on the blotters was presented in a way that did not reflect customers’ true income or net worth; the blotter reflected only the highest number in the range of values from which it was taken.

In addition to the blotter review, IFMG’s Compliance Department performed a review of account documents approximately 10 days after transactions had been completed to further assess suitability and to ensure that all paperwork had been completed. However, because the transactions had been completed by that time, the Compliance Department often had difficulty obtaining the requested information and completing its review. As a result, FINRA found, a large backlog of unapproved transactions developed at IFMG from 2004 through 2006. That backlog delayed final approval of transactions for weeks, months and in some cases, for over a year. Despite knowledge of the growing backlog, IFMG failed to take effective action to address the problem, which continued until the firm changed to a pre-approval suitability review system between May and August of 2006. IFMG no longer operates as a broker-dealer.

In the Wells Fargo, PNC Investments and WM Financial Services cases, FINRA found that the firms did not provide adequate guidance to principals who approved variable annuity transactions, or in the case of WM Financial, UIT transactions.

Prior to November 2004, Wells Fargo provided no factors to guide principals in determining suitability. From November 2004 to September 2006, it instructed principals to consider such factors as a client’s liquidity needs, tax deferral needs and time horizon, without providing guidance on how to apply such factors to determine suitability, and did not capture information relevant to such factors. After September 2006, Wells Fargo removed its list of factors to consider when recommending VA transactions, leaving its principals and brokers without any guidance on how to determine suitability in VA transactions.

FINRA found that PNC Investments instructed its principals to consider factors such as a customer’s source of funds, health and investment time horizon without collecting or recording all the information necessary for principals to assess suitability and to consider factors such as the client’s age, need for tax deferral and liquidity without providing guidance on how to apply such factors in their suitability review. Principals therefore applied inconsistent definitions. Firms are required, if they include such factors in their procedures, to have systems in place to implement the factors.

In the case of WM, the firm had no procedures specific to determining suitability of UIT transactions, and provided no guidance on how to review exception reports concerning exchanges from VAs and mutual funds intoUITs. Compliance personnel, therefore, were provided no criteria to identify patterns of exchanges over time or whether such exchanges were suitable. WM also required certain paperwork to be completed for exchanges, capturing the rationale for the exchange and all fees, including surrender changes, but provided no guidance to principals to use the information to determine if the exchange was suitable.

Wells Fargo, PNC and WM also failed to detect patterns of potentially questionable transactions, which could indicate a broker’s failure to properly tailor recommendations to each customer’s investment needs and situations. At Wells Fargo and PNC Investments, these included patterns of brokers selling the same guaranteed minimum income benefit rider to all or nearly all customers who purchased certain VA carriers’ products. WM Financial Services failed to adequately investigate certain brokers’ potentially unsuitable VA exchanges into UITs, despite concerns raised by the firm’s compliance department.

In settling each of these matters, none of the firms admitted nor denied the charges, but consented to the entry of FINRA’s findings.

If you have questions about an investment you made in a variable annuity (VA), mutual fund or unit investment trust (UIT), or if you believe that you have been the victim of a securities fraud, the Law Offices of David A. Carter, P.A. may be able to help. The Law Offices of David A. Carter, P.A. is a South Florida securities fraud, securities arbitration, investor protection, and Chapter 7 bankruptcy law firm based in Boca Raton. David Carter is a securities attorney that reviews securities fraud cases throughout the country and Florida, including securities cases in Delray Beach, Boynton Beach, Stuart, Fort Myers, Naples, Deerfield Beach, Fort Lauderdale, and Fort Pierce. To contact the Law Offices of David A. Carter, P.A., please call 561-750-6999, or email us at contact@carterpa.com. For more information about the Law Offices of David A. Carter, P.A., you can also visit our website at www.carterpa.com.

Why Make a Section 1035 Exchange?
There are various reasons why a variable annuity contract holder may want to exchange an existing variable annuity contract.
• Many annuity contracts now offer premium – sometimes called bonus – credits toward the value of your contract, of a specified percentage ranging from 1-5% for each purchase payment you make.
• Also, in recent years, there have been new developments in annuity features, especially in variable annuities, that are valid reasons to consider an exchange. The number of investment options has increased. Less expensive variable annuity contracts have been created. Death and living benefits have been enhanced. Also, with the growth in the stock market in the 1990s, many insurance contract holders have wanted to take part in that growth. These are all valid reasons for considering exchanging one insurance contract for another.

Why Not Make a Section 1035 Exchange?
Generally, the exchange or replacement of insurance or annuity contracts is not a good idea, for a variety of reasons.
• “Bonus” or “premium” payments made to you are usually offset by the insurance company’s adding other charges it makes to you.
• Other contract provisions, like surrender charges, eventually expire with an existing contract. However, new charges may be imposed with a new contract or may increase the period of time for which the surrender charge applies.
• You may also have to pay higher charges, such as annual fees for the new contract.
• You may not need the costly new features of the new contract.
• In many instances your broker is getting paid a higher commission for a variable annuity than he or she would for the sale of another securities product, such as a stock, bond, or mutual fund.

What You Should Watch For
You should exchange your annuity only when you determine, after knowing all the facts, that it is better for you and not just better for the person who is trying to sell the new contract to you.
Much of the sales growth of variable annuities in recent years has been from Section 1035 Exchanges. Even though some variable annuity enhancements have made variable annuities more attractive, you need to be sure that the exchange meets your objectives and benefits you. Variable annuities are long-term, retirement-oriented investment vehicles, and exchanging them may not benefit you.
Brokers or insurance agents recommending the exchange of an annuity contract must tell you important facts about the pros and cons of the exchange. Your broker or insurance agent is permitted to recommend such an exchange to you only if it is in your best interest and only after evaluating your personal and financial situation and needs, tolerance for risk, and the financial ability to pay for the proposed contract. This “suitability” obligation is based on FINRA rules, specifically, FINRA’s “Know Your Customer” Rule (among others).
To be sure that a replacement annuity is right for you, you should specifically ask the person recommending that you exchange your variable annuity:
• What is the total cost to me of this exchange?
• What does the change in the surrender period or other terms mean for me?
• What are the new features being offered? Why do I need or want those features?
• Are those features worth the increased cost?
• Will you be paid a commission for the exchange, and if so, how much is it?
You should not sign any exchange form or agree to exchange or purchase an annuity until you study all of the options carefully, have all of your questions answered, and are satisfied that the exchange is better than keeping your current contract.
If you have questions about annuity switches or a variable annuity you purchased, or if you believe that you have been the victim of a securities fraud, the Law Offices of David A. Carter, P.A. can help. The Law Offices of David A. Carter, P.A. is a South Florida securities fraud, securities arbitration, investor protection, and Chapter 7 bankruptcy law firm based in Boca Raton. David Carter is a securities attorney that reviews securities fraud cases throughout the country and Florida, including securities cases in Orlando, Jacksonville, Tampa, Tallahassee, Gainesville, and West Palm Beach. To contact the Law Offices of David A. Carter, P.A., please call 561-750-6999, or email us at contact@carterpa.com.