Planned Giving or Planned Commissions?

Planned Giving or Planned Commissions?

News story posted in Ethics on 7 February 2007| comments
audience: National Publication | last updated: 18 May 2011
Print
||
Rate:

Summary

In a Notice of Intent filed on November 28, 2006, the Office of Securities for the State of Maine in conjunction with the Maine Attorney General's office is seeking to revoke the license of a registered representative who allegedly compelled his elderly client to name him trustee of her estate, amend her living trust to establish a testamentary foundation account at the National Heritage Foundation, and then after her death sold a tax deferred variable annuity to the account in violation of NASD rules and Maine securities law and/or ethics rules.

By Marc D. Hoffman

PGDC Summary:

According to allegations contained within a Notice of Intent 06-073 filed on November 28, 2006, the State of Maine Office of Securities in conjunction with the State Attorney General is seeking to revoke the agent's license of James L. Clifford on the grounds he recommended an unsuitable investment under NASD Rule 2310 and otherwise engaged in unlawful or unethical conduct in the securities business under Maine securities law. A hearing is scheduled for March 8, 20007 in Augusta, Maine.



Notice of Intent 06-073

State of Maine
Office of Securities
121 State House Station
Augusta, Maine 04333-0121

 IN RE: James L. Clifford       

ALLEGATIONS

1. James L. Clifford ("Clifford") (CRD # 1419478) is an individual who has been licensed in Maine as a sales representative or agent since at least 1985. His last known address is 955 Eastern Avenue, Holden, Maine 04429.

2. From December 4, 1997, to the present, Clifford has worked as a sales representative or agent at the Brewer, Maine, branch office of Investors Capital Corp. ("ICC").

3. Pearl P. Schoppe ("Ms. Schoppe") was a life-long resident of Orono, Maine, and the valedictorian of the 1936 graduating class of Husson College in Bangor, Maine.

4. In May of 1996 Ms. Schoppe established a living trust (the "Schoppe Trust") with herself as trustee and with two of her relatives designated as trustees upon her death. The original trust document directed that upon Ms. Schoppe's death, after payment of any of Ms. Schoppe's debts, expenses and taxes, and certain distributions, the remainder of the trust property was to be held in trust for Husson College with income distributions to fund a scholarship program.

5. Ms. Schoppe was conservative with her investments. She essentially bought only certificates of deposits and fixed annuities.

6. In October of 1998, Ms. Schoppe, then age 80, amended the trust document to, among other things, change the trustee upon her death to Clifford. The amendment also changed the provision regarding the distribution of the remainder of her trust property. As amended, instead of the property being held in trust for Husson, the trust instrument dictated that the property was to be "distributed to the National Heritage Foundation F.B.O. Pearl P. Schoppe Foundation."

7. The charitable purpose stated by Ms. Schoppe on the National Heritage Foundation application was "Assist students of the Greater Bangor/Brewer, Orono/Old Town, ME area who need financial aid to attend Husson College. To be paid out interest only 80% of interest to go to students, 20% of the interest to go back into the Foundation so foundation will continue to grow."

8. Ms. Schoppe died on January 19, 2000.

9. On March 7, 2000, in Singer Island, Florida, Clifford and John T. "Dock" Houck, II, CEO of National Heritage Foundation, ("NHF") completed the paperwork for "National Heritage Foundation Inc. FBO Pearl Schoppe FNDTN" to purchase a $150,000 variable annuity from Conseco Variable Annuity Insurance Company through ICC, using funds from the Schoppe Trust.

10. On May 11, 2000, Clifford sent an additional $50,000 from the Schoppe Trust's checking account to Conseco to add to the variable annuity.

11. The subaccounts chosen by Clifford and Houck were largely more-risky growth funds, when Ms. Schoppe's stated intent and investment history dictated the use of more conservative income-producing investments.

12. The variable annuity sold by Clifford to the foundation was unsuitable for the charitable purposes expressed by Ms. Schoppe. There was no tax benefit and no value to having a death benefit on the life of Mr. Houck to offset the higher costs and reduced liquidity of the investment.

13. Clifford received $12,600 in commissions on these transactions. In addition, Clifford has paid himself trustee fees exceeding $42,000.00 from the trust assets despite the fact that he appears to have provided little if any valuable services to the trust.

14. Since the purchase of the variable annuity in March of 2000, Husson College has received no scholarship money from the Pearl P. Schoppe Foundation.

15. Under federal law, variable annuities are securities and the offer and sale of variable annuities is regulated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933 and Securities Exchange Act of 1934.

16. The NASD is a national securities association registered with the SEC under 15A and in accordance with the provision of 19(a) of the Securities Exchange Act of 1934.

17. NASD Rules are filed with the SEC and promulgated under 19(b) of the Securities Exchange Act of 1934. NASD rules apply to "all members and persons associated with a member. Persons associated with a member shall have the same duties and obligations as a member" under the association's rules. NASD Rule 0115.

18. ICC is a member of NASD and Clifford is a person associated with ICC.

19. NASD Rule 2310 requires that a member have reasonable grounds for believing that a recommended purchase is suitable for a customer based on the facts disclosed by the customer including the customer's investment objectives.

20. By virtue of his training and experience, Clifford knew the requirements of NASD Rule 2310. Through his customer relationship with Ms. Schoppe, Clifford knew her investment objectives and the charitable purpose for which she established the Pearl P. Schoppe Foundation. Thus, Clifford intentionally or knowingly failed to comply with NASD Rule 2310. 32 M.R.S.A. 10313(1)(B).

21. By using funds of the Schoppe Trust to purchase an unsuitable investment, Clifford engaged in unlawful or unethical conduct in the securities business. 32 M.R.S.A. Planned Giving or Planned Commissions?

In a Notice of Intent filed on November 28, 2006, the Office of Securities for the State of Maine in conjunction with the State Attorney General's office is seeking to revoke the license of a registered representative who allegedly compelled his elderly client to name him trustee of her estate, amend her living trust to establish a testamentary account at the National Heritage Foundation, and then after her death sold a tax deferred variable annuity to the already tax-exempt fund in violation of NASD rules and Maine securities law and/or ethics rules.

*  *  *  *  *


The Planned Giving Design Center first contacted the Maine Office of Securities to verify the status of the complaint and were directed to Michael J. Colleran who is overseeing the case in the Maine Attorney General's office. Mr. Colleran confirmed the action was still pending and stated the allegations would be amended in a few days to make an additional reference to NASD rules.

We next contacted John T. "Dock" Houck, CEO of the National Heritage Foundation for comment. He stated a settlement was currently being negotiated with the State of Maine and that the fund account would be transferred from NHF to Husson College. No other proposed financial terms of the settlement were disclosed.

When we inquired regarding the appropriateness of using a tax deferred variable annuity in an tax-exempt foundation account of this type and whether there were other accounts at NHF utilizing this type of investment, Houck stated that although he is not an expert, he believes the investment to be more suitable for use in a charitable remainder trust.

We then spoke with Tom Johnston, legal counsel for Husson College. Although he could not discuss the specifics of the pending complaint, he confirmed a hearing is scheduled for March 8, 2007 in Augusta, Maine.

For current information regarding this matter, go to www.maine.gov/pfr/securities/enforcement.htm and click on "Current Actions."10313(1)(G).

Add comment

Login or register to post comments

Comments

Group details

Follow

RSS

This group offers an RSS feed.
 
7520 Rates: November 2.4% October 2.2% September 2.4%

Already a member?

Learn, Share, Gain Insight, Connect, Advance

Join Today For Free!

Join the PGDC community and…

  • Learn through thousands of pages of content, newsletters and forums
  • Share by commenting on and rating content, answering questions in the forums, and writing
  • Gain insight into other disciplines in the field
  • Connect – Interact – Grow
  • Opt-in to Include your profile in our searchable national directory. By default, your identity is protected

…Market yourself to a growing industry