$100 million fraud targets pensioners

Looks like the regulators aren’t the only ones looking for noncompliant members of the financial services family. According to a recent article by Reporter Greg Iacurci in InvestmentNews, approximately 370 brokers, advisers, and insurance agents are being implicated in an alleged investment fraud that may have cost more than 1,000 investors at least $100 million in lost savings. Most of those investors were seniors and the fund involved were drawn from their pensions.

According to Iacurci, the law firm Peiffer Wolf Carr & Kane, which is representing investors, filed a wave of litigation against intermediaries and their respective advisory firms in courts across the country related to the sale of “structured cash flows” to clients. The products were offered by the firm Future Income Payments. Investors were promised an income stream based on the repackaging of income from pension plans.

Lawsuits cite negligence and faulty oversight

The lawsuits targeted advisers, broker-dealers, etc. in the Los Angeles, Houston, Chicago, northern Florida, and Philadelphia areas. Charges claimed advisers were negligent and breached their fiduciary duty and contracts when selling these investment products. According to the law firm’s managing partner Joseph Peiffer, speaking about the case, red flags were everywhere, but no one appeared to have noticed.

In total, nearly 370 investment intermediaries across the country sold the structured cash flows offered by Future Income Payments. In return, they received upfront commissions between 6 percent and 10 percent. Advisers specifically in the crosshairs are:

• John Marshall of JB Marshall Financial;
• Michael A. Frisch of Secure Investment Management;
• Paul E. Ferraresi of Founders Group Inc;
• Matthew Linklater of Linklater Financial Group;
• Leland Blair Whiting of Horner Townsend & Kent;
• Gregory P. Durette of Future Secured Financial; and
• Daniel T. Sharpe Jr. of DTS Financial Services.

The law firm had previously filed a similar complaint against Jeffrey A. Pickett of Pickett Financial in Ohio, and expects to file individual lawsuits against 60 to 70 more advisers and insurance agents, and may ultimately file class-action litigation.

How was the fraud marketed?

According to the lawsuit, the alleged scheme worked on two levels:

• First, Future Income Payments (FIP) offered pensioners upfront, lump-sum payments in return for a portion of their monthly pension payments over a specific term, often three to five years. FIP used these pension streams to fund the cash flows sold to investors. Investors paid a lump sum to FIP in order to receive a monthly income stream for around 5 to 10 years and were promised returns in the range of 6%-8%.
• Some investors also were urged to fund premium payments for indexed universal life insurance policies with the income from these structured cash flows. Since FIP stopped making payments to investors in April 2018, many investors will likely lapse their policies.

More bad news

Several state regulators have found the upfront payments to pensioners to be unlawful loans that charged an effective interest rate of more than 100% in some cases.

Moreover, FIP is run by a convicted felon, Scott Kohn, who pled guilty in 2006 to three felony offenses related to trafficking in counterfeit goods, according to the lawsuits. He was sentenced to 15 months in federal prison. Attorneys say he is on the run, and believe he is somewhere in the Philippines. No one from FIP could be reached for comment. Mr. Kohn formed Pensions, Annuities, and Settlements in 2011, and changed its name to Future Income Payments in 2014.

According to the attorneys representing the allegedly defrauded investors, its initial focus is on the investment advisors, but it plans to look up the chain to distributors, life insurance companies, accountants, and custodians.

It’s going to be a cold winter for individuals and firms named in the suit

Where was compliance? Good question. Maybe the oversight professionals were busy elsewhere? Or maybe they were just too busy. It that is the case, Patrina can help. We’ve built a business on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.