NASD announced today that it has fined Securities America, Inc. of Omaha, NE, $2.5 million for failing to adequately supervise a broker who NASD alleges lured long-term employees of Exxon Corporation into retiring prematurely with unreasonable and exaggerated promises of high returns from reinvested funds from their company retirement plans. Securities America must also pay $13.8 million in restitution to 32 former Exxon employees. Securities America also agreed to hire a consultant who will conduct a comprehensive review of the firm's seminar presentations, advertising, and systems and procedures relating to retirement planning and investment recommendations for retirees.
The broker, David L. McFadden, has been charged by NASD in a separate complaint with securities fraud.
"Deciding when to retire is one of the most important and difficult decisions employees make, and it must be based on thoughtful advice and reasonable assumptions about the investment returns of one's retirement account," said James S. Shorris, NASD Executive Vice President and Head of Enforcement. "In this case, Securities America's lack of supervision resulted in Exxon employees being fraudulently induced into retiring early based upon false and misleading projections of future investment returns on their nest eggs. Together, these unsuspecting investors lost millions of dollars of life savings after following advice that benefited no one other than Securities America and its representative."
In connection with today's announcement, NASD is releasing a new Investor Alert, Look Before You Leave: Don't Be Misled By Early Retirement Pitches That Promise Too Much
As referenced in the settlement with Securities America, and as alleged in NASD's complaint against McFadden, NASD found that McFadden developed and presented seminars directed at long-term Exxon employees who were generally between the ages of 50 and 60. At those seminars, he told attendees that they could retire early by liquidating the assets of their company-sponsored 401(k) plans and pension plans, depositing those assets in accounts with Securities America, and making investments recommended by McFadden. Attendees were told that returns on those investments would allow them to replace their current salary income with systematic monthly withdrawals from the new accounts.
NASD found that McFadden recommended and sold variable annuities, Class B or Class C mutual fund shares and exchange-traded funds (ETFs) for his program. Most of the customers who opted to follow the program entrusted McFadden with the entire cash proceeds of their company-sponsored retirement accounts - and thus forfeited their right to receive a lifetime monthly benefit under their pension plan.
NASD found that McFadden's seminar materials included a slide showing projections of account values over 20 years with rates of return ranging from 5 percent to 18 percent - for a hypothetical customer having retirement savings of $600,000 who made annual withdrawals starting at $58,000 per year (9.67 percent of the initial balance) after one year. Withdrawals were also shown as increasing by $6,000 every five years. The slide depicted the investment compounding steadily over time and included no explanation that investments offering the potential for higher rates of return also involve a higher degree of risk to principal. McFadden referred to his own program as "managed money" for which he illustrated returns of 11 percent to 14 percent - rates that would be necessary to sustain the promised annual withdrawals.
In a letter to one customer and his wife, McFadden indicated that they could maintain annual withdrawals of $60,000 per year, or 8.34 percent of their estimated $718,600 in retirement savings:
"Since you indicated the need for $60,000 in today's dollars to retire, we can conclude that everything is OK from a financial perspective if you retire at 55."
McFadden wrote to another customer suggesting that it might be advisable to make withdrawals greater than about 7.85 percent of his savings:
"Is your monthly income providing you enough cash to do the things you want? … If the $6,000 is enough, I would keep it there, but if things are tight, you should take more since we can't change for 5 years."
Customers who followed McFadden's program, however, could not maintain the recommended withdrawal amounts without depleting their retirement accounts to levels that threatened their incomes. NASD found that as account values declined due to withdrawals and market losses, McFadden continued to suggest to customers that he could achieve rates of return ranging in some cases from 11.5 percent to 18 percent, the minimum necessary to sustain the withdrawals he told the retirees they could take. In an effort to achieve these returns, McFadden engaged in discretionary, and in some cases unauthorized, variable annuity sub-account exchanges and mutual fund switches. The 32 customers at issue in this case deposited cash and securities totaling more than $22.2 million for the purchase of variable annuities, mutual funds and ETFs for their retirement programs.
Under the settlement announced today, Securities America will also pay the customers restitution of more than $13.8 million -- more than $11.6 million to compensate for actual losses and $2.2 million in interest. This amount corresponds to the compensatory damage and interest component of a May 15, 2006 arbitration award that was challenged by Securities America and McFadden and upheld by a federal judge.
Securities America also agreed to hire a consultant who will conduct a comprehensive review of the firm's seminar presentations, advertising, and systems and procedures relating to retirement planning and investment recommendations for retirees.
In settling these matters, Securities America neither admitted nor denied the charges, but consented to the entry of NASD's findings.
Under NASD rules, a firm or individual named in a complaint can file a response and request a hearing before and NASD disciplinary panel. Possible remedies include a fine, censure, suspension, or bar from the securities industry, and disgorgement of gains associated with the violations.
The issuance of a disciplinary complaint represents the initiation of a formal proceeding by NASD in which findings as to the allegations in the complaint have not been made and does not represent a decision as to any of the allegations contained in the complaint. Because this complaint is unadjudicated, interested persons may wish to contact the respondent before drawing any conclusions regarding the allegations in the complaint.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2005, members of the public used this service to conduct more than 4.3 million searches for existing brokers or firms and requested more than 194,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling (800) 289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.nasd.com.
("Copyright 2006 National Association of Securities Dealers, Inc.")
