In December 2016 the Massachusetts Securities Division filed a complaint against LPL Financial LLC (“LPL”) and one of its advisors, Roger S. Zullo, relating to the unsuitable sales of variable annuities to multiple customers of Zullo and LPL from January 2013 to December 2016.
LPL is headquartered in Massachusetts. Zullo worked in Boston, MA.
These regulatory complaints were resolved by the entry of consent orders in 2017. The orders reveal that Zullo, who had worked in Boston for LPL since 2004, sold approximately 68 annuities in 2014 -15. He generated $1.825 million in commissions from May 2013 to April 2016. 98% of those commissions were generated by the sales of the AIG Polaris Premium III annuity.
These annuities sales generated a 7% commission for Zullo and LPL, 90% of which was credited to Zullo.
The complaint and LPL’s consent order detail Zullo’s scheme. He targeted many older and or retired nurses, health care workers or administrators. Many of these customers had been clients of Zullo for years. He frequently had the clients redeem existing annuities to purchase the Polaris Premium annuity, although they frequently incurred surrender charges and, with the purchase of a new annuity, entered into a new deferred sales charge period.
In order to carry out his scheme, Zullo routinely fabricated details of the clients’ financial and investment experience background. He overstated the net worth of customers, inserting non-existent outside accounts valued in excess of $1 million in their suitability profiles. In one instance, he listed the birth date of a client as 1944 (age 70) when her actual birthdate was 1934 (age 80). This was particularly egregious since on prior LPL account forms Zullo had entered the correct birth date; however, in this instance, an 80 year old would not qualify for the purchase of this type of annuity.
LPL’s consent order details the woeful lack of supervision of Zullo which supported the separate charges against LPL. Initially, prior to the time in question, Zullo had several compliance issues. Branch exams revealed that he had used personal email to conduct firm business, used unapproved marketing material, possessed a blank account form signed by a client and had failed to report a customer complaint he had received.
Zullo’s immediate supervisor raised questions with her superior and the compliance department regarding the sales of the same annuity with the same income rider to multiple clients and the fact that many purchases were funded by the sales of existing annuities which incurred surrender charges.
The supervisor’s concerns were never addressed by her superior or compliance personnel.
The Massachusetts Securities Division found additional fault with LPL’s supervisory efforts (or, more precisely, the lack thereof). The consent order noted that while Zullo inflated many clients’ net worth on annuity suitability forms, LPL was already in possession of new account forms for these clients with inconsistent net worth information. Moreover, Zullo was able to provide the faulty net worth information because the annuity suitability forms reviewed by compliance were not seen or acknowledged by the clients.
LPL surveillance personnel never took note of the fact that it was unlikely that nurses, healthcare workers, etc., would have net worths in excess of $2 million, as Zullo sometimes noted.
Lastly, although Zullo indicated that clients had not purchased annuities before, they had actually made prior annuity purchases while customers at LPL. This fact was never picked up by compliance surveillance personnel.
In the consent orders, Zullo agreed to a bar from the industry, a censure and fine of $40,000. In addition, he is to disgorge the commissions he earned.
LPL agreed to a $975,000 fine, disgorgement of commissions, the returning to customers of any surrender charges they incurred in purchasing the unsuitable annuities and to offer rescission to the customers who purchased the unsuitable annuities.
What is troubling about this case is that the LPL consent order explains that Zullo had been the financial advisor for many of these customers for several years. In many instances he was their only advisor. It is certainly understandable that such clients, many of them senior citizens, would trust their long time investment advisor.
That makes LPL’s supervisory failures all the more significant. The prior compliance history, the immediate supervisor’s expressed but neglected concerns, the failure to consult other client records already in LPL’s possession – all these red flags – probably account for the significant financial penalties imposed on LPL.
Guiliano Law Group
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