Lake County, California, is said to be known for a few things besides having the state’s largest freshwater contained lake—pear production, bird watching, wineries, recent meth lab busts and Glenn Neasham, the convicted insurance agent who thought, he claims, he was selling a good product to a competent senior.
In the wake of Neasham’s felony conviction for theft, a jail sentence to go along with it, and his ongoing legal battle to get that conviction overturned, financial advisors and insurance agents are wondering if they might also fall into the same legal hole that Neasham cannot seem to escape. While the chances are slim for a replication of all of the factors and personalities in Neasham’s case to reassemble themselves elsewhere, there is no safe harbor in current law to prevent a jail sentence for an agent who sells an annuity to a customer who may turn out to have dementia or Alzheimer’s at the time of the sale.
As most readers who have followed the case know, a 12-person jury found former insurance agent Neasham, now 52, guilty of felony theft on Oct. 23, 2011 for selling an annuity to a then-83 year-old woman named Fran Schuber.
As ProducersWEB writes, Judge Richard Martin denied the motion for a new trial in February, refused to drop the felony charge to a misdemeanor and sentenced Neasham to probation and 300 days in jail. Martin stayed all but 90 days of the sentence. Neasham, out on bail, plans to appeal.
While the incident occurred in February 2008, an updated suitability model law passed by the National Association of Insurance Commissioners (NAIC) in March 2010 and passed in some 20 states so far remains broad on suitability and does not mention any litmus test for mental capacity.
Meanwhile, suitability itself becomes a circular argument—it must be suitable, there must be “reasonable” efforts to confirm suitability, “reasonable” procedures must be maintained, and there must be “reasonable” grounds to believe the transaction is suitable.
The model law establishes a regulatory framework that holds insurers responsible for three things. One, for ensuring that annuity transactions are suitable. Two, for requiring that producers be trained on the provisions of annuities in general and the specific products they are selling. And three, for making these suitability standards consistent with the suitability standards imposed by the Financial Industry Regulatory Authority (FINRA).
The law requires insurer reviews of every annuity transaction, and clarifies that insurers are responsible for compliance with annuity protection provisions — even when insurers contract with third parties.
“In general terms,” an executive summary of the updated model law states, “prior to recommending a particular annuity to a consumer, an insurer or producer must make ‘reasonable efforts’ to obtain the consumer’s ‘suitability information’...Based on the suitability information gathered in the transaction, the producer, or insurer if no producer is involved, must have reasonable grounds to believe the transaction being recommended to the consumer is suitable.”
Put another way, this time from an unofficial statement from 2012 by the chair and vice chair of the NAIC’s Life Insurance and Annuity Committee, “an insurer shall maintain reasonable procedures to detect recommendations that are not suitable. This may include, but is not limited to, confirmation of consumer suitability information, systematic customer surveys, interviews, confirmation letters and programs of internal monitoring.”
The NAIC Suitability of Annuity Transactions Model Regulation, however, is not required to become law in each state under Section 989J of the Dodd Frank Wall Street Reform and Consumer Protection Act until June 16, 2013. Moreover, violation of suitability laws does not appear to trip any felony statute. According to the model regulation’s summary, a violation “may result in an insurer, general agency, independent agency or insurance producers being ordered to take reasonably appropriate corrective action for any consumer harmed by the violation.”
There is no “safe harbor” within the law to protect agents who sell annuities, if those agents are going to be held accountable after the fact for having to ascertain the mental competence of an applicant, says financial advisor and estate planner John L. Olsen of Olsen & Marrion, LLC, publisher of "Index Annuities: A Suitable Approach," with his St. Louis-Based firm’s partner Jack Marrion.
Olsen says he and Marrion, who has a doctorate in mental impairment, are working on putting together a packet that will include some tests and other procedures that insurance companies can put into place that will hopefully minimize this problem. Olsen is also co-hosting a webinar on the case.
As for the suitability of the product at hand in this case — the Masterdex 10-year annuity, by Allianz — the California Department of Insurance (CDI) had approved the product, the commissions for it, for sale to people up to age 85. "How could they assist in the prosecution of this in the case of an 83 year-old?” asks Michael Kitces, partner and director of research at Pinnacle Advisory Group in Columbia, Md.
Moreover, Allianz backed the product, but then Allianz threw Neasham under the bus, according to Olsen and others advisors, offering no protection from the underwriter.
The CDI said in a press release that it discovered “that Neasham, doing business as Glenn Neasham Insurance Agency, sold a $175,000 annuity to an 83-year-old woman on Feb. 6, 2008.”
“The investigation determined that the victim lacked the mental capacity to enter into this contract, and that the terms and conditions of the annuity contract were not in her best financial interest,” said CDI in its press release, not stating why the product was not in her financial best interest.
One question that has arisen is whether Allianz Life itself reviewed its Masterdex product with Schuber. When asked for comment, Sara Thurin Rollin, Allianz Life’s director of external communications, explained that on February 18, 2008, it began a program where consumers age 75 or older are called to confirm their understanding of key features of the Allianz fixed annuity product they have purchased.
“Fran Schuber purchased an annuity from Allianz Life just before this program began. As a result, she was not contacted as part of the 75+ Calls Program at Allianz Life,” Rollin said. “The 75+ calling program is designed to confirm that consumers understand the key features of the product they are purchasing and is not designed to assess that person’s mental capacity.”
In the absence of any current safe harbors, industry observers such as Olsen think that the NAIC needs to produce some model regulations to address this, so that agents can avoid prosecution for falling on the wrong side of a mental capacity assessment done at point of sale.
While the NAIC has done much work on suitability, it does not seem to have plans to pursue this issue. It appears that neither the NAIC’s Life Committee or the Market Conduct Committee are working on it. It has been suggested that some feel it would not be appropriate for regulators to develop standards regarding mental competency, since that would require a professional medical opinion. Diagnostic services are indeed a whole other ball of wax, and requires, besides a degree, much more liability coverage. At least for now, the regulators' focus will continue to be on suitability and unfair trade practice standards.
However, the fact that the strengthened model law covers annual income, financial situation and needs, objectives and intended use of the annuity, there would appear to be all of the ingredients for at least a cursory test of mental acuity at the point of sale. “In a discussion with a client of all of these matters, I think it is going to be pretty apparent if there is impairment in having this conversation that would give an adviser cause to say, ‘Gee, I can’t get this information that I need,’” said Ron Panneton, National Association of Insurance and Financial Advisors (NAIFA) senior counsel.
Another factor in whether this situation is part of a future trend centers on whether the verdict is upheld upon appeal. It could set a precedent then, but so many have pointed to glaring holes in the case, the way it was handled and, more so, that it ultimately could be overturned.
R. Brian Fechtel, CFA and Agent at Breadwinners' Insurance in Larchmont, N.Y., said he couldn’t “imagine this case having any ramifications among agents because it seems that the court and the prosecution has been so misguided that the jury verdict will not stand.”
Another reason why agents might want to fret a little more are the sheer numbers provided by demographics—dementia is expected to triple by 2050, but the process is under way now.
Con artists aside, with interest in the demographics and the disease from Congress and the Federal Government agencies all have their eyes on the aging of Americans, so there may be a redoubling of efforts to protect them, which might spill over into the courts.
There are other compelling factors that signal that this case is a one-time fluke, including whether the cases might even find time in courts.
Calls and emails to various district attorneys' state and national associations yielded not one drop of interest, nor a call back, even in consumer-friendly, and high senior population states like Florida and New York.
“I don’t see it as a trend,” said Ingrid Evans of Evans Law, an elder abuse law firm in San Francisco and Los Angeles, of DAs prosecuting agents who sell annuities to people who have dementia.
“A lot of the district attorney and attorney generals, the agencies don’t have money to prosecute —there are a lot of cases that should be prosecuted generally that aren’t because financial abuse cases have not been a priority if you have an understaffed agency,” Evans says.
“Financial elder abuse cases are typically brought in civil lawsuits and the trial lawyers that bring them are essentially one of the last lines of defense in helping to protect and to secure justice for senior citizen victims,” Evans said.
She said many cases are not reported at all. The senior may die, and the family doesn’t want to pursue action.
Evans Law is engaged in pursuing a class action case of multiple lawsuits involving Allianz and AVIVA USA alleging deceptive sales tactics for deferred annuities to seniors. The MasterDex 10, among other products, are involved, according to the list on the company website.
Lake County, Calif., Deputy District Attorney Rachel Abelson, who prosecuted the case, isn’t getting calls from across the country or state asking for feedback or tips on prosecuting annuity sales agents, she said.
Abelson also mentioned the budget.
“More prosecutions, especially with state resources right now, are probably not happening, she said. Abelson mentioned looking into larceny cases under the false pretense law, or theft by false pretenses.
Lake County, California is also a unique place.
According to census numbers, California has the largest number of elderly citizens of any state, but Florida has the highest percentage of elderly accounting for total population. Moreover, Lake County was ranked highest in the state for percentage of people age 65 or older (19.5%), so it would tend to be extra-vigilant concerning vulnerable older people. Its banks clearly keep tabs on customers, as was the case when Fran Schuber’s own bank called the local district attorney’s office when Fran Schuber seemed to be under the influence of her boyfriend, and was already known to have issues by the attentive employees there, who did not know who her beneficiary was, according to Abelson.
“That day she was “very confused,” Abelson said. “It was not a question of a good day/bad day. She was having a bad day,” Abelson said. Of course, by the time the trial came around, Schuber was unfit to testify, her disease having already ravaged her mind.
As far as crime goes, Lake County, renowned for its pear production (fifth in the nation, according to one profile), is more concerned with battling meth lab activity than elder financial crimes.
Elder financial crimes and felony theft, as was found in the Neasham case, may seem strange given the constraints of stretched DA budgets in states and counties in California and, indeed, across the nation. Moreover, Abelson acknowledged that she herself doesn’t really understand annuities.
“We first thought the suspect was the boyfriend — we don’t have that much knowledge about annuities, if that makes sense...the annuity didn’t benefit this person in her lifetime...I still don’t understand annuities...I have been to trainings by the California Insurance Department where the CDI has talked about them,” Abelson says of understanding and training on annuities.
Lake County states that in 2009 this office received 4,618 investigative reports for review, and approximately 3,455 criminal complaints and petitions were filed in Lake County courts. As of the 2010 census, the population was 64,665, up from 58,309 at the 2000 census. The county gets its name for having the largest natural lake wholly within California, in an area north of San Francisco.
“The Criminal Division of the Office of the District Attorney is to work with all segments of the criminal justice system and the community to protect the innocent, ensure that the guilty are properly punished, and safeguard the rights of all. One part of that obligation is to separate criminals from society and to make them pay the penalty for their crimes. Another part of that same obligation is to see that innocent people accused of crimes are not prosecuted,” the Lake County DA’s office states on its website.
At the time of Neasham’s arrest, Steve Poizner, then the California Insurance Commissioner, noted that 2,800 insurance fraud-related arrests had been made by the CDI since he had taken office in 2007 — “more arrests than have been made during any other three year period, under any previous insurance commissioner.”
The current CDI under Commissioner Dave Jones offered little to say on this particular case and discussed relevant suitability and senior protection laws in place as governing.
Also, Robert Miller, M.S., M.A., president of NAIFA, said in New York State, his neck of the woods, nothing is brewing, nor has he heard of anything in the works.
“Obviously New York is a very regulatory — I am sure it has registered there. I think anyone in the financial services has a target on their back in this environment,” Miller warned.
“It’s unfortunate when an isolated event could threaten the legitimate use of a financial product that has benefited and will continue to benefit so many individuals and families across the country,” Miller said in a NAIFA blog post.
Another place to look for possibly similar action is in Florida because of its high percentage of seniors within its population.
However, there doesn’t seem to be anything similar afoot, although any open cases would be confidential.
From Jan. 1, 2008 to April 17, 2012, the Florida Division of Insurance Fraud had received approximately 230 annuity fraud referrals related to seniors, it shared with NUL.
Of these 230 referrals, 146 were opened into cases. Of those, 10 resulted in conviction.
States are replete with instances of outright fraud and embezzlement by agents or persons posing as agents to defraud seniors, but it is unlikely that one of these 10 convictions was due to suitability.
“The Florida OIR is familiar with the issues surrounding annuities being sold to frail and vulnerable seniors and our office routinely investigates complaints of such fraudulent activities. During the legislative session which just ended, OIR supported the passage of House Bill 1065 which would strengthen annuity protections for all consumers. The bill did pass the House of Representatives, but unfortunately, time ran out in the Senate and the bill died in committee,” a spokesman says.
However, there are senior suitability protections already provided for in Florida law. Yet an effort to make it a felony to deceive seniors with an unsuitable annuity product failed in the legislature in 2008 as part of the John and Patricia Seibel Law enactment from June 2008.
The Act was named after a Venice, Florida couple in their 80s, who were sold $600,000 worth of annuities that could not be touched without large penalties for 15 years.
Former Florida Chief Financial Officer Alex Sink, head of the Florida Department of Financial Services, was quoted expressing disappointment that the legislation had failed “to make it a felony to intentionally deceive a senior into an inappropriate annuity product.”
CFO Sink wanted to designate certain violations of the insurance code to be felonies because DFS claimed Florida State attorneys are reluctant to initiate criminal prosecutions of misdemeanor offenses, says a summary then from the law firm of Fowler White Boggs Banker and attorney Michael Underwood.
“However, after the effective date of the Seibel Act, insurers might face even greater administrative penalties for offenses against senior consumers under new powers granted OIR to order rescission,” Underwood wrote.
In combination with the “Homeowner’s Bill of Rights Act,” Florida had significantly increased penalties for violations of the Florida Unfair Insurance Trade Practices Act. For example, an insurer can now face an administrative fine of $40,000 for a single willful violation up to an aggregate fine of a quarter of a million dollars, instead of $20,000 and $100,000 respectively under current law, Underwood noted.
Kansas, where Commissioner, Health Committee chair and former NAIC president, Sandy Praeger, who has been very active on senior issues, heads the insurance department, notes that “annuity suitability investigations are very fact-intensive, so it is difficult to generalize since no two are exactly alike.”
“They are not like complaints involving other kinds of insurance products where adherence to contract language or claims handling may be the most critical considerations. Annuity suitability is about reconstructing the past in order to determine if an insurance product was appropriate at the time of sale,” notes Kansas.
But for this not to happen again, says consumer advocate Birny Birnbaum, an economist and former Texas regulator who is now with the Center for Economic Justice (CEJ), Austin, “two things are necessary.”
“First, insurers must have far better review of their agent sales to catch this type of activity. The new suitability model helps here because it adds insurer liability for unsuitable sales and consequently incentivizes insurers to introduce more effective monitoring practices,” Birnbaum says.
“Second, insurers must revise the compensation structure for these products — huge commissions front-loaded with sale — to encourage suitable sales that will remain in place. If the market incentives for producers are to sell — as opposed to compensation based on sales and retention of the policy, as found in auto and homeowners insurance — regulators and insurers will always have an uphill fight because regulatory requirements that conflict with market incentives tend to fail.” Birnbaum says.
However, “the industry has served the American public well. Seventy-five million families have purchased insurance products through agents — the only people bringing something when people need it the most. Of the gazillion people who sell insurance — our record is as good as it gets,” NAIFA’s Miller says.
“I think a lot of questions will be raised for a long time — questions around whether the defense attorney did a poor job of describing how the product works, the judge and other elements of the case,” Pinnacle’s Kitces says.“The case could be the artifact of a bad defense attorney...or it could be a precedent in the other direction,” Kitces notes. So, the question is, will there be a perp walk of insurance agents arrested, bound for jail, for selling an allegedly unsuitable annuity to the wrong person in the wrong state? Not likely.
And will Neasham end up in a cell with a meth lab felon? If it gets to that point, he will need a good lawyer.