South Florida Arbitration & Litigation Lawyer Blog
Outside Business and Selling Away FINRA Arbitration and Litigations Attorney, Russell L. Forkey, Esq.
January, 2012:
James Joseph Ahmann (CRD #2983399, Reg. Representative, Bloomingdale, Illinois) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Ahmann consented to the described sanction and to the entry of findings that he participated in private securities transactions and sold bonded life settlement securities to customers pursuant to those transactions after his member firm specifically denied him permission to do so. The findings stated that Ahmann’s customers invested $1,750,000 in seven bonded life settlements and in total, the bonded life settlement company paid approximately $120,475.90 in commissions related to Ahmann’s sales.
The findings also stated that Ahmann lacked a reasonable basis to recommend the purchase of the bonded life settlements to his customers given his failure to perform a reasonable investigation concerning the life settlement product. Although Ahmann inquired about the manner in which the company that offered the life settlements procured life insurance policies for its offerings, he took no further action when the company’s principals pointedly refused to share that information with him. The findings also included that Ahmann failed to obtain adequate information regarding the qualifications of the company principals to issue life settlements and to examine reports of the company’s financial status in order to assess the company’s economic well-being. Ahmann failed to adequately inquire about the companies that assessed the life expectancies of the underlying insureds and re-insured the underlying life insurance policies prior to recommending and selling the bonded life settlements. FINRA found that Ahmann’s firm’s CEO asked Ahmann whether a sale of stock and subsequent withdrawal of funds in a customer’s account was in any way related to his suspected participation in private securities transactions involving the bonded life settlements. Ahmann told the CEO that he was not participating in the sale of life settlements and had not recommended them to investors, which was not true. In fact, prior to the date of Ahmann’s misrepresentation, Ahmann had solicited the customer to purchase a bonded life settlement and had signed transaction paperwork related to that purchase. FINRA also found that the language in sales materials for the bonded life settlements Ahmann provided to a customer was oversimplified and did not contain any description of risk or extenuating factors that could impact the investment’s performance, thereby failing to provide the reader with a sound basis for evaluating the merits of the investment. The statement in the sales material that it was intended to serve as "layman’s description" was misleading given the complex nature of the product and the risks involved. Ahmann did not present the sales material for review to a registered principal of his firm prior to using them in connection with his sales of the bonded life settlement to a customer.
In addition, FINRA determined that Ahmann lacked a reasonable basis to recommend the purchase of installment plan contracts offered by a non-profit corporation that represented itself to the public as a charitable organization to three customers, given his failure to perform a reasonable investigation concerning the product. The installment plan contracts, which were securities, promised a tax deduction, as well as fixed deferred payments at an unspecified rate of return, in exchange for each customer’s transfer of ownership of existing annuities to the non-profit. Ahmann’s customers exchanged existing annuities with a combined accumulated value of at least $195,000 for the installment plan contracts. Moreover, FINRA found that Ahmann failed to adequately ascertain which charities, if any, the non-profit supported, the manner in which the non-profit invested customer funds, and the existence of a cease and desist order issued by a state against the non-profit which was publicly available on the internet and preceded Ahmann’s installment plan contracts sales. Furthermore, FINRA found that Ahmann learned that the non-profit’s application for status as a 501 (c)(3) organization was pending and had not yet been granted by the U.S. Internal Revenue Service (IRS), and that investors would not be entitled to a tax benefit if the non-profit’s application was ultimately denied. Ahmann failed to inform his customers that the non-profit’s application remained pending and that they would not receive a tax benefit if the application was ultimately denied. A predominate feature of the non-profit’s product was the reported tax savings an investor would enjoy through the purchase of an installment plan contract. Issues concerning the tax-deductibility of the product were clearly material as it was a key feature of the product and, together with the non-profit’s status as a charitable organization, a factor that distinguished it from other similarly structured products. Its tax-deductibility was also prominently advertised by the non-profit and, in many instances, a key factor in investors’ choice over alternative products. The findings also stated that in connection with his sale of the installment plan contract to a customer, Ahmann presented the customer with illustrations the non-profit prepared, which included a cover page, a flow chart graphically depicting the terms of the proposed installment plan contract and a 1099 Statement detailing the amount of the scheduled payments and listing that portion of the annual payment that was to be reported as taxfree and the portion that was to be reported as ordinary income. The flow chart failed to reflect that the total payout amount included a return of principal and did not specify the rate of return. Such omissions provided an oversimplified and exaggerated presentation of investment returns. The descriptions concerning tax deductions and tax savings were oversimplified, incomplete and misleading. In addition, the flow chart provided no explanation as to how the tax figures were derived. The 1099 Statement description heading for the principal column, entitled “reported as tax-free,” provided the false impression that this column represented tax-free income. The findings also included that Ahmann did not present the flow chart and 1099 Statement for review to a registered principal of his firm prior to using them in connection with his sales of the installment plan contract to a customer. FINRA found that Ahmann did not provide written notice to his firms of his additional employment with another company and his association with the individual who ran the comapny, nor did he provide written notice of his receipt of compensation from that individual. Both Ahmann and the individual held insurance licenses and in some instances, Ahmann and the individual shared commission on the sales of fixed annuities. Ahmann routinely used stationery and fax cover sheets bearing the name of the company, his business card identified him as being associated with the company, and Ahmann and the individual shared all expenses associated with the maintenance of the company’s office. Documents related to the sales of the bonded life settlements identified the individual as the sales agent, though Ahmann clearly solicited and arranged for the sales. Although the commission payments associated with the bonded life settlements were issued to the individual, the latter paid the commission monies to Ahmann. The company subsequently issued Ahmann an IRS 1099 Form reflecting these commission payments. FINRA also found that Ahmann held Series 6 and 63 licenses but never held a Series 7 license that would permit him to engage in the sale of securities but nevertheless, he engaged in the sale of bonded life settlements and installment plan contracts, each of which are securities. (FINRA Case #2009019041001).