Charles Ponzi.. Could Have Been A Stockbroker or Insurance Agent!
[Updated 2020] We were very happy to see the Wall Street Journal write about the newest phenomena in the investment fraud world. The states and the Financial Industry Regulatory Authority (FINRA) do a good job policing the ranks of stockbrokers but are virtually powerless if the brokers they sanction simply go and apply for an insurance license.
Insurance license? Yes!
Once upon a time, the lines between securities and insurance were quite clear. If you wanted to buy stock, you called your broker. If you needed car insurance, you called your agent. While the lines between those more traditional products are still clear, new investment products truly blur the lines.
Layer on that most states don’t have rules prohibiting bad brokers from simply getting insurance licenses and the potential for problems increases. In the end, it is the consumer who gets hurt.
We have seen several insurance agents selling Tenant-in-Common interests. We say they are a security but that hasn’t stopped insurance agents from selling these products. (In fact, we know that some real estate agents are also selling TIC interests.)
Want another example? Many of the 419 plan scams (welfare benefit plans) were sold by stockbrokers, accountants and insurance agents. Is it an insurance product or security. We have prosecuted several cases involving a Ponzi scheme called PIWM. While PIWM functions like an offshore hedge fund, we know of several insurance agents and even an accountant who were peddling this product.
Ditto with variable annuities. Some of the worst scams involving seniors involve placing them unsuitable annuities or worse, having them sell their existing annuities on unfavorable terms simply so they can churn their accounts and generate additional commissions.
FINRA works with the states to put all information about stockbrokers on a free, easy to navigate website. The BrokerCheck system allows investors to know if their stockbroker has prior complaints, suspensions, sanctions, criminal problems, bankruptcies or lawsuits. There is no national insurance agent data base and most states don’t even maintain this information.
More importantly, most states can’t automatically ban a person from becoming an insurance agent even if securities regulators have removed him or her from the securities industry. That means bad brokers are free to become bad insurance agents and in many cases just keep on selling the same products to an unsuspecting public.
When a stockbroker makes a mistake, there is reasonably good chance of recovering any losses from the broker’s employer. Not so with insurance agents. Many of the rogue agents are independent agents and have no deep pockets. If they are insured, their coverage typically doesn’t cover sales of securities.
The takeaway from this is to know what you are buying as well as who is doing the selling. If the product has any type of investment component, it may be a security.
The Wall Street Journal quotes the director of the Utah Division of Securities, Keith Woodwell, as saying “If you do something bad enough to lose your securities license, you probably shouldn’t have an insurance license either.” We agree.
If the person you are investing with claims to have an insurance license but not a stockbroker’s license, check BrokerCheck anyway. It’s free and it might change your mind if you learn that your agent was once a stockbroker with a bad record.
The year after we wrote this post, FINRA and the National Association of Insurance Commissioners pledged to better communicate to stop the revolving door between the two industries. Unfortunately, the necessary laws and rules needed to stop bad brokers from becoming insurance agents are still not in place.
In 2018, the SEC went after 13 people involved in the sale of a billion dollar Ponzi scheme, the Woodbridge Group of Companies. An investigation by InvestmentNews in 2020 revealed that three of those former brokers were still licensed to sell insurance!
We believe that if a bad broker or insurance agent is kicked out of one industry he or she be barred from the other. Without proper safeguards, bad advisers can easily become insurance agents. (It is more difficult for a barred insurance agent to become a broker although FINRA relies on self reporting making it hard determine who is a thief and who isn’t.)
Until the fifty states and FINRA can get their act together, we recommend the following steps before you invest with an insurance agent:
First, check the BrokerCheck system and contact your state insurance commissioner to make sure the agent is licensed and find out if he or she has a record with the state.
Avoid any agent that is overly aggressive and pressures you to buy a policy, annuity or make an investment right away.
Make sure the agent can explain the investment. (You would be surprised how many can’t, especially when you ask about tax implications or are dealing with exotic insurance products.)
As much as we love independent agents, remember that if you are dealing with a big company and something goes wrong, you can probably collect. When dealing with a small independent, collection is often an issue. Winning in court isn’t the same as winning and getting paid.
If you suspect that your agent or broker is dishonest, find good counsel right away. You can also report him or her to the state insurance commission.
If you lost money in any type of investment fraud, contact us right away. Our investment fraud lawyers have successfully prosecuted cases against stockbrokers, investment advisers, insurance agents and accountants. For more information, visit our investment fraud recovery page. Ready to see if you have a case? Contact attorney Brian Mahany online, at or by telephone at 800.669.7782.
All inquiries are protected by the attorney client privilege and kept in confidence. We accept cases nationwide.