FINRA enforcement actions are rare because generally the offending broker or brokerage firms settles allegations of misconduct before a formal enforcement action is brought by entering into a Letter of Acceptance, Waiver and Consent or AWC, where offending broker or brokerage firm consents or admits to a narrow finding of facts, pays fines or penalties, and is sometimes, but not often barred or suspended from conducting securities business.
However, last week, the Financial Industry Regulatory Authority Office of Hearing Officers, Department of Enforcement, filed a Disciplinary Action against Patrick W. Chapin and Christopher B. Birli for allegedly ripping off dozens of State University of New York (“SUNY”) employees who participated in the SUNY retirement program by switching one proprietary MetLife Annuity for another, simply to generate commissions and fees.
According to the FINRA Complaint, Chapin and Birli focused their business on servicing SUNY employees who participated in the SUNY retirement program, and for a period of seven years between approximately July 2004, and December 2011 they recommended that 45 of their customers switch existing MetLife variable annuities (Financial Freedom Account or “FFA”) contained withintheir SUNY retirement accounts with new MetLife variable annuities (Preference Plus Select/MetLife Preference Premier or “PPS/MPP”) contained in MetLife IRA accounts held outside the SUNY retirement plan.
Chapin & Birli Didn’t Comply with MetLife Policies
MetLife generally prohibited the direct exchange of the FFA for the PPS/MPP, but allowed such exchanges on an exception basis. Rather than comply with MetLife policies and procedures, Chapin and Birli intentionally circumvented the prohibition through a two-step transaction. Chapin and Birli recommended that their customers (1) surrender their FFAs and use the funds to purchase a product offered by TIAA-Cref, contained within the SUNY retirement program; (2) wait at least 90 days, and then sell the TIAA-Cref product and use the funds to purchase the PPS/MPP product in a MetLife IRA.
Chapin and Birli concealed the nature of this two-step transaction they recommended from MetLife, submitted false and misleading paperwork, and made misrepresentations and material omissions to Firm personnel, including when asked why their customers were moving their money to TIAA-Cref.
Of course in connection with the “switch” customers were all given new seven-year surrender schedules with their new variable annuities, thereby exposing them to liquidity risk in the event they needed to access their capital and customers lost any death benefits that had accrued in excess of their new contract
Chapin & Birli Fraudulently Earned Approx $1.5M
The total approximate value of the funds that were moved from FFAs through TIAACref into the PPS/MPPs was $21 million. In connection with the process Chapin and Birli earned 7.15% on the transactions or approximately $1.5 million.
The SUNY retirement program offered MetLife products as well as products from other plan providers, such as TIAA-Cref, which offered its own variable annuity. SUNY employees could not invest in the PPS/MPP through the SUNY retirement program.
MetLife’s PPS/MPP was a retail variable annuity which was generally only available for purchase through a non-qualified brokerage account or an IRA. The PPS/MPP had higher annual fees and expenses as compared to the variable annuities offered within the SUNY retirement platform. A transfer of FFA to PPS/MPP, if allowed through an exception, would have generated a 2% GDC for the agents. In contrast, when customers purchased new B-Class PPS/MPP products with money from outside MetLife, the GDC for such transactions was 7.15 %.
Chapin and Birli’s two-step transaction worked as follows: they had their clients surrender the FFA, placed the customer’s funds in a TIAA-Cref variable annuity within the SUNY retirement plan for at least 90 days, and then transferred those funds from the TIAA-Cref product to the PPS/MPP (B-Class) product.
Chapin and Birli had their clients keep client funds in the TIAA-Cref product for at least 90 days to avoid scrutiny by MetLife: Chapin and Birli knew that MetLife’s compliance systems monitored for transfers of funds outside MetLife that returned to MetLife within 90 days.
Even after MetLide discovered their conduct, Chapin and Birli responded falsely by claiming that customers in general, and the specific customers referred to, were being solicited to purchase the TIAA-Cref product by TIAACref agents and that Chapin and Birli were trying to recover the business.
Chapin & Birli Refuse to Comply
In late February, 2014, FINRA’s Department of Enforcement contacted counsel fur Chapin and Birli s in order to schedule a second day of testimony for each Respondent and proposed the week of March 10, 2014 in Buffalo, New York. Citing various alleged scheduling conflicts, counsel for Chapin and Birli sought to postpone the testimony. Accordingly, the Department and counsel for Respondents agreed to hold the interviews on March 24 and March 25, 2014 in Buffalo, New York. Respondents failed to appear for testimony and failed to seek any adjournment of such testimony. Rather, in communications on the eve of Chapin and Birli , advised the Department that they would not be complying further under Rule 8210 based on their belief that FINRA’s jurisdiction had expired on March 16, 2014.
To date, Chapin and Birli have neither provided the requested information and documents nor appeared for their on-the-record interviews. FINRA is now seeking findings of fact and conclusions of law that Chapin and Birli committed the violations and Chapin and Birli be required to disgorge fully any and all ill-gotten gains and/or make full and complete restitution, together with interest.
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