Hundreds of Arizona senior citizens cashed in their retirement investments and paid millions of dollars in unnecessary fees, according to lawsuits accusing a Scottsdale-based estate-planning company of taking advantage of vulnerable clients.
Federal and state court lawsuits claim officials with National Future Benefits Unlimited generated large commissions by scaring and misleading elderly clients into bailing out of existing annuities and buying new ones. The moves left the clients paying steep surrender fees to insurance companies and facing potential tax liabilities, according to the lawsuits.
Annuities, sold by insurance companies and meant to serve as long-term investments, are growing ever more popular as companies attempt to tap the burgeoning population of retirees with offers of lucrative interest rates and guaranteed incomes for life.
In one of the lawsuits, an insurance company is accusing National Future Benefits of systematically targeting clients to cash out their annuities; in the other, an elderly Phoenix couple contend they were defrauded out of most of their assets.
National Future Benefits President Randall Jaeger denies any wrongdoing. He said that facts in both lawsuits have been twisted to make his company look bad. Jaeger said in cases where his clients were hit with fees, bonuses and improved interest rates from new products more than covered the costs, so that no client lost money.
"I know how it looks," Jaeger said of the lawsuits. "I'm upset over how it was twisted and turned . . . how it was made to look like I was trying to take (clients') money."
Financial experts say the allegations in the two cases underscore the pitfalls that can be associated with buying annuities and the care seniors need to take when considering such an investment. Annuities can carry substantial fees and tax penalties for early withdrawal.
In addition to facing the two lawsuits alleging fraud and illegal activity, National Future Benefits has a history of state regulatory complaints and this year was investigated by Arizona Adult Protective Services. The lawsuit involving the elderly couple led to an $866,000 settlement this year and triggered an elder-abuse claim filed with the Arizona Attorney General's Office.
The Attorney General's Office would not discuss whether it opened an investigation into the claim.
But the Arizona Department of Insurance, which oversees the sale of annuities, renewed Jaeger's insurance license in July without raising any red flags.
Department officials acknowledged last week that they were unaware of allegations against Jaeger until contacted by The Arizona Republic. Now, a department spokeswoman said it has launched an investigation into whether Jaeger made false statements when he renewed his license.
Department spokeswoman Erin Klug said a review of Jaeger's license application found that he failed to report the lawsuits. The renewal form requires disclosure of any pending cases alleging fraud, coercion or dishonest business practices; Jaeger reported there was none.
Klug said the allegations against Jaeger are "concerning" and that Insurance Department investigators are scrutinizing the lawsuits.
Jaeger defended his company's record as exemplary. He said the failure to report the lawsuits on his license application was a clerical error made by another employee and promised quick correction.
"The last thing I would do is jeopardize my license," he said.
What are annuities?
As pension plans dwindle and individuals take greater personal responsibility for their retirement planning, it seems certain that annuities will play a larger role for more Arizonans as they try to supplement their Social Security benefits.
The product got a boost last month after the Government Accountability Office recommended annuities to investors as a way to bolster income after retirement, creating new interest in an already booming market.
But to many, annuities are an unknown quantity. Only licensed insurance agents can sell annuities, but annuities are not insurance policies. They are investment contracts in which insurance companies agree to pay regular returns based on premiums. There are various types of annuities with different selling points to entice buyers. The two most common annuities offer fixed and variable rates of return.
Fixed annuities offer guaranteed monthly payments. Variable annuities allow you to direct where a portion of your money is invested, which could affect the rate of return.
Annuities come with stinging penalties called surrender charges - often 9 percent of the balance - if a buyer wants out of a contract early. The amount of the surrender charges decreases each year of the contract until it reaches zero at the end of the penalty period, typically between seven and 14 years.
Retired Arizona Adult Protective Services investigator Bill Dettelback, who spent years in the banking industry before he began investigating scams against the elderly, said the lawsuits against Jaeger's company raise concerns about annuity sales to the elderly.
"There are banks and investors who sell annuities to people in their 60s, 70s and 80s. These are 20- to 30-year annuities," he said. "That ought to be against the law."
Dettelback said many senior citizens can't anticipate their future needs and shouldn't be risking their finances in an investment that might be delivering monthly payments but likely won't mature until after they have died.
"An elderly person doesn't know what his or her liquidity needs are going to be," Dettelback said, although he added that purchasing annuities late in life "does make sense under some circumstances."
National Future Benefits, which also has offices in Oro Valley and in Henderson, Nev., has been in business since 1993.
Company agents evaluate their clients' financial needs, structure retirement plans, prepare trusts and draft wills and other documents. The company offers life insurance and annuities as part of its business.
Jaeger points to a near 20-year history of estate planning and says he has thousands of clients who have consistently ranked him at the top of satisfaction surveys.
Insurance records show that 10 complaints have been filed against Jaeger or National Future Benefits since 2001. At least four of the complaints alleged problems over annuities. Only one complaint, alleging inappropriate marketing practices in 2003, was substantiated and resulted in a fine. The rest were closed as unsubstantiated.
Two Iowa-based insurance companies claim that Jaeger and employees at National Futures Benefit caused hundreds of Arizona residents to get hit with surrender charges from the insurers after they were deceived into canceling their annuities.
In a U.S. District Court lawsuit filed in April, Midland National Life Insurance Co. and North American Company for Life and Health Insurance accused Jaeger of "engaging in a systematic and deceptive effort to replace large numbers of annuity contracts."
Agents working for National Future Benefits falsely told clients that Midland and North American were facing financial trouble and that if they didn't get their money out, they would lose it all, according to the lawsuit.
Midland and North American claimed the actions were orchestrated as a way to earn commissions on the sale of new annuities from other companies. As a result, many policyholders ended up with "tens of thousands of dollars less than the values accumulated under their existing . . . annuity contracts," according to the lawsuit.
Jaeger said the claims aren't true. He said his clients made money on the transfers or else they wouldn't have made them.
Jaeger said the Midland lawsuit is an attempt to stop him from moving clients into better, more profitable products. He said in the past 12 years his company has sold nearly $500 million worth of Midland and North American products and that the companies are balking now that he has found "better positions" for some of his clients.
"They are mad. But to tell us we can't move someone's money away is ridiculous," Jaeger said.
Midland and North American also accuse Jaeger of trying to end-run state consumer-protection laws.
The lawsuit alleges that to avoid complying with regulations that require clients to sign a form acknowledging the risks and advising them to consult with annuity providers prior to cancellation, National Future Benefits did not directly replace policies; company officials instead encouraged some clients to cancel their policies and request that the money be paid to them directly.
"The policyholder was then encouraged to submit the premium for the new annuity contract as if it were new money," the lawsuit states.
National Future Benefits denied skirting laws and maintained that proper forms were filled out. Because of market changes and timing, the company said it was sometimes in the client's best interest to surrender an annuity rather than make an immediate transfer to another one.
Jaeger faced much more personal claims in a lawsuit filed by an elderly Phoenix couple in a Maricopa Superior Court in January.
While acting as their adviser, Jaeger defrauded them and persuaded them to loan him hundreds of thousands of dollars, according to the lawsuit. The suit also said he advised them to cancel annuities, costing them more than $145,000 in penalties and $30,000 in interest.
Henry Gardner, 89, and his wife, Dorothy, who died this year at 82 after complications from Alzheimer's disease, said in their suit that Jaeger befriended them, took over their finances and that nearly $1.4 million of their $1.5 million in assets ended up with Jaeger or one of his companies.
Court records show that Jaeger this year paid the Gardners $865,710 as part of a settlement agreement, which is awaiting court approval.
Jaeger says the Gardners' suit was a personal blow because he was friends with the couple for years before they invested any money with him. He says he reluctantly took over their finances after the couple begged for help.
"It hurt," Jaeger said. "They used to come to my home for Thanksgiving dinner."
Henry Gardner's attorney said the lawsuit speaks for itself.
"The Gardners firmly believed they were taken advantage of, and they fought to recover their property," Phoenix lawyer Paul Harter said.
Jaeger said the Gardners were happy with his services until a disgruntled former employee complained to Arizona's Adult Protective Services that he was targeting clients, a claim Jaeger rejects.
Jaeger said the subsequent Adult Protective Services investigation sparked the lawsuit and resulted in the settlement.
Dettelback, the former protective-services investigator, said he is familiar with the Gardner case. While he said he could not confirm any investigation, Dettelback said the allegations raised in the Gardners' civil lawsuit are accurate and comprehensive.
"It is a sin. It is very, very depressing," he said of the suit. "There is no question about it. It cost them money to cancel those annuities. They suffered."
In their 147-page lawsuit, the Gardners said that Jaeger, from 2004 through 2010, persuaded them to loan him $490,466 and later $458,573 and then to purchase a $407,000 ownership interest in National Future Benefits.
In their lawsuit, the Gardners say that Jaeger persuaded them to name him their trustee and personal representative. They say he advised them to surrender several annuity policies in which their money had been invested and that he reaped substantial commissions from new annuities that he persuaded them to buy.
In their lawsuit, the Gardners said the new policies cut them off from their money. In the event of financial problems or medical emergencies, the Gardners would have to pay steep fees to cancel the policies and sacrifice a substantial amount of their principal and interest.
And by the time the penalty periods expired on the new policies, the Gardners would be nearly 100 years old.
by Robert Anglen The Arizona Republic Nov. 7, 2011 12:00 AM
Arizona seniors lost millions in annuity fees
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