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Hefty Sanctions from Maryland

I came across an interesting article last week in the compliance publication, “Insurance Compliance Insight”, authored by Alan Prochoroff (1), about an order from the Maryland Insurance Administration. Mr. Prochoroff’s piece summarizes the state’s concerns with a Baltimore producer, Philipp A. Rousseaux, a Maryland insurance agent, and his firm, Everest Wealth Management. (Mr. Rousseaux also conducts business as an investment advisor representative under his firm, Everest Investment Advisors, Inc.).

The order was the result of coordination between the State Insurance Administration and the Securities Division of the Maryland Attorney General’s office, and hands down some pretty hefty sanctions for a number of key violations, which occurred over a span of more than 10 years. The order outlines a number of regulatory infractions, and included problems with annuity applications from numerous insurance carriers. The end result was a fine of $62,400 and revocation of Mr. Rousseaux’s insurance license, as well as that of Everest Wealth Management.

The violations were divided into the following distinct categories:

  1. The misuse of MetLife’s Medallion Signature Guarantee Program stamp.
  2. Annuity applications were pre-signed by Mr. Rousseaux and were then attached to applications taken by producers at his firm.
  3. Failure to report an investigation into his “activities” by the Maryland Securities Division on his application to renew his insurance license with the state insurance administration, as required by law.
  4. Misleading advertising in numerous infomercials developed and aired by Mr. Rousseaux, despite written notification from Allianz Life Insurance Company of North America (Allianz Life) that the commercial violated the company’s advertising policy and was not approved for use.
  5. Using an “Investment Committee” – explained by Mr. Rousseaux as a “mind game” and “psychological warfare” he engaged in with potential clients to pressure them to invest with him.
  6. The “VIP Program”, established for his insurance and advisory clients, which provided items of value that violate potential rebating and licensing regulations in the state of Maryland.

What was particularly interesting to me were the allegations relating to Mr. Rousseaux’s marketing and sales techniques, which I would argue are the most risky behaviors identified in the order. While all of the outlined violations are important, the way Mr. Rousseaux attempted to manipulate his clients’ emotions, and the way he marketed fixed annuity products, likely cause many carriers’ compliance officers to cringe. (Read the full article for details, below).

This points to the benefits of having a strong system of reasonable controls in place to help identify and rectify problematic advertising and sales practices.

Maryland Sanctions Insurance Agency, by Alan Prochoroff

Have we reached the point where insurance companies are going to have to question the authenticity of a medallion stamp?

One might think so in view of an order Maryland has issued taking action against the producer licenses of a Towson insurance agency, Everest Wealth Management, and its owner, Philip Rousseaux Jr. Both are based in Towson.

Both stand accused by the Maryland Insurance Administration and the state’s attorney general of various nefarious acts. The MIA’s Dec. 2 order revokes Rousseaux’s producer license and that of Everest Wealth Management, and fines them $62,400.

The Insurance Administration also issued orders against three Everest employees: Taylor Seth McCandless, John George Anthony and Michael DiPaula.

All parties have a right to request a hearing, and an attorney for Everest said the company would ask for one.

The MIA action comes after Maryland attorney general Brian Frosh tried in June seeking to shut down Everest.

Frosh accused the insurance agency of fraudulently misrepresenting the risks of its investment strategy and sought to bar Rousseaux and both Everest entities – Everest Wealth Management, an insurance agency, and Everest Investment Advisors – from offering investment services in the state.

Rousseaux countered that the attorney general unfairly targeted his business and filed a lawsuit in August alleging it violated his rights.

The latest salvo from the Insurance Administration is another attempt to “weaken” Everest the week before it has a court hearing on that lawsuit, said Alex Brown, an attorney that represents Everest.

“By the time we get to litigate this, Everest will be severely harmed,” Brown told The Baltimore Sun. “I think the timing is suspect.”

Brown said Everest will remain in business while the matters are settled in court.

But let’s start at the beginning with the medallion stamp.

Think of it as a notary seal on steroids. A medallion stamp is a guarantee used during the transfer of securities in which the transferring financial institution affirms that a signature is genuine and accepts liability for any forgery. Medallion signatures are trusted because the process makes it pretty hard to forge an investor’s signature.

First, the SEC must approve an application to obtain a medallion stamp. Once issued, its use is tightly controlled – each stamp is numbered, access is strictly limited and the stamps are typically locked away when not being used. Additionally, a medallion could be used only for that company’s business, and a registered rep can’t use one to guarantee their own signature, or the signature of their client.

Rousseaux had been a producer with MetLife Securities and Metropolitan Life Insurance Company and had access to MetLife’s medallion stamp. He resigned from both in October 2004.

At all times, MetLife used the procedures previously outlined, and the company’s internal log showed Rousseaux last used its medallion stamp in June 2004.

Fast forward.

According to the MIA’s order, between April 2005 and August 2007 – after his resignation – Rousseaux submitted 24 annuity applications to Washington National Insurance and 59 annuity applications to Allianz Life. Each was stamped with the MetLife medallion stamp.

The MIA order quotes a former Everest employee as saying Rousseaux had become frustrated with the medallion stamp requirement because it had led to him losing a potential client. The employee also said that Rousseaux had admitted to having pre-stamped a number of annuity application forms.

The trouble was, Allianz had updated its annuity applications several times – and its client authorization page, where the medallion stamp was to go, several more times on top of that. Each new version included the month and year of the update.

The use of outdated forms might have raised some eyebrows.

So did MetLife’s discovery that there was no record or log of Rousseaux using its medallion stamp subsequent to his departure in October 2004. Nor could MetLife find, for any time from 2005 to 2007, any signature guarantee documents where Rousseaux was the registered representative for the transaction.

Also questionable was the sales process in place at Everest. Investigators found instances in which Rousseaux had pre-signed annuity applications. The MIA said it found 20 that Rousseaux had signed, but they were dated when he was known to have been out of the country.

Further, the Everest employee who processed annuity applications acknowledged he kept a folder in his desk containing blank agent report forms that Rousseaux had already signed. He said he had been instructed by the office and compliance managers to submit the pre-signed forms with Rousseaux’s signature, then go back to the submitting producer to obtain their signature on the replacement form. Usually, the submitting agent signs first, then sends it up the line for review and approval.

There were other issues, outside the sales process and use of the medallion stamp.

MIA said Rousseaux failed to update his records to show he was under investigation by Maryland securities regulators. Nor did he mention a 2014 settlement with Delaware in which he had been charged with transacting business as an unregistered investment advisor and employing unregistered investment advisor representatives.

Maryland authorities also had issues with a January 2015 television infomercial that Rousseaux and Everest had produced, “Money Guys – Secrets to a Successful Retirement.” The MIA specifically objected to: * a screen reading, “Protected From Market Losses;” * the lack of a disclosure that early withdrawal from an annuity contract would result in loss of principal, bonus and interest; * the use of the term “plan,” which the state prohibits being used to describe an insurance policy or annuity; * charts used without a disclosure that results aren’t guaranteed and are for illustrative purposes only; * a screen shot promising, “Earn 12 Percent This Year,” without disclosing the source of that growth– a one-time bonus and the percentage that represents the income rider roll-up – or revealing that the growth might not be achieved again; * referring to “5 percent return” instead of “5 percent interest,” which MIA said is misleading because it consumers could believe the products are investments, rather than fixed annuity insurance products; and * eferring to the transfer of risk of market losses as “sleep insurance,” which Allianz objected to because it equates an insurance product with the client’s ability to sleep at night.

Allianz, in fact, told Everest’s compliance officer that the infomercial violated state insurance regulations and its own internal policies – and even instructed Everest not to run the infomercial without its approval since it featured Allianz annuity products.

Two YouTube videos also pushed the envelope – beyond the point where state regulators wanted. The videos pushed annuities and also promised returns “up to 15 percent, and guaranteed returns of up to 8 percent every year for income, in writing.” Neither contained disclosures that annuities may include higher surrender charges, longer surrender periods, lower caps, higher spreads or other restrictions that aren’t in similar annuities that don’t offer a bonus.

The MIA’s order tells Rousseaux to remove the videos from YouTube. That has been done.

Authorities also object to Rousseaux “blurring the lines” between Everest Wealth Management and Everest Investment Advisors – and the distinction between insurance products and fee-based investment advisory services. During a radio program about investing, for example, Rousseaux mentioned Everest Wealth Management without mentioning that it is an insurance agency and only offers insurance products.

The MIA’s order also tells of an presentation Rousseaux made at a conference in which he allegedly boasted about engaging in psychological warfare and “mind games” with clients. The MIA faulted him for using ploys to manipulate clients into trusting him and giving him their assets.

The MIA’s actions follow those of the attorney general who, in June, announced efforts to shut down another component of Everest Wealth Management and Everest Investment Advisors because of alleged problems with the firms’ investment advisory operations.

The attorney general issued a show cause order containing allegations that Rousseaux and his companies used prohibited marketing tactics to blur the distinction between insurance products and fee-based investment advisory services.

There were other allegations as well – including one that Everest Investment Advisors misrepresented the total amount of assets under management, making the company look larger than it was for marketing purposes.

Additionally, Frosh accused Rousseaux and Everest of lying about an investing program called the Everest Dynamic Growth Model in 2013. According to the attorney general, customers were told the program outperformed the Standard & Poor’s 500 Index by 37 percent over a 10-year period. “But he knowingly used performance figures that did not reflect his investment strategy, did not tell customers they were based on a retroactive calculation and did not reflect actual results,” the attorney general said.

Frosh said consumers should be wary if an investment company promises a guaranteed rate of return or an unusually high return on investments.

“If it sounds too good to be true, it is,” he said.

But Rousseaux said in a statement released at the time that, “While Maryland’s attorney general disagrees with our marketing techniques, Everest’s extended and deeply experienced legal team is fully confident we have taken the proper measures to comply with all securities regulations.”

(1) Copyright 2015 ProBusiness Publishing LLC All Rights Reserved

Dec. 7, 2015

Insurance Compliance Insight is a general circulation weekly publication focused on insurance compliance and regulatory issues. Nothing within it should be interpreted as offering investment advice, legal counsel or other professional services. Subscribers can freely share ICI content within a subscribing company, but copyright law prohibits sharing content with those outside that company without written permission from the publisher.