Insurance agents in California may become burglars if they go to a client’s home to sell annuities with surrender charges.
That is one of the outcomes some observers fear in the trial of former agent Alan S. Lewis in Riverside. The proceeding was scheduled to start on June 23, but it might still be in session in July because of all the charges, testimony and evidence.
The prosecutor said Lewis persuaded seniors to sell their annuities and certificates of deposit to buy another annuity and suffer a surrender charge. Court records and Lewis said the second annuity was the Allianz MasterDex 10, which is a complicated two-tier annuity that is no longer sold. The product offered attractive benefits, but the owner had to hold the annuity for 10 years and annuitize for five years to collect the maximum returns and bonus. That was a key reason the prosecutor called it a “phantom bonus.”
Lewis said he in hindsight realized that it might not have been the best product to put elderly clients into and sold some of them a third annuity, with what he said was a better bonus to offset the surrender charges.
The prosecutor said Lewis was “twisting” just to collect commissions, costing 12 of his clients $300,000 in surrender charges. The charges allege that the surrender charges amounted to embezzlement and grand theft. Because he met with clients in their homes, he is also accused of burglary. He faces 19 felony counts and one misdemeanor of embezzlement, eight felony counts of burglary and two felony counts of grand theft. He has been in jail since late February.
The preliminary hearing took six days, which is exceptionally long for a hearing. The proceeding took a one-day break in the middle so the prosecutor could attend a class on annuities. The trial promises to be long as well, with voluminous documents, including annuity contracts, and testimony.
Reaction to the case has run the gamut, even among insurance producers. Almost all comments on the article itself, in email and phone calls, have started with at least some unease about the repeated annuity sales. A few people have said Lewis is getting what he deserved.
“It’s real, real simple: we in the business are shepherds. We take care of our clients and put their interests ahead of ours at all times,” said one commenter (edited slightly). “We are 100 percent truthful and honest at all times and 100 percent professional and ethical. Any other approach to our business should be run out of the business immediately! Arrested? If the shoe fits.”
But even with the discomfort some felt about the sales, many others said the bigger issue is the precedent.
“Sadly, it doesn’t appear some of the agents commenting have a clue as to the true danger such a case brings to their business,” another poster said. “Yes, Mr. Lewis is on trial, but so are all insurance agents. And yes, the case can be made that some of the advice he provided clients was aggressive and even extremely questionable. … [But] if they get a conviction, this will set a dangerous precedent. It won’t matter if you’ve got yourself an MBA, MDRT, CFP or M-O-U-S-E. Just sell an annuity with surrenders and you’re going to jail.”
Another commenter had a helpful suggestion: “All agents better start working out and learning self-defense because it won’t be easy in prison.”
In fact, it isn’t easy in jail for Lewis, who is 51. He is in a facility in Banning, Calif., where he said he is housed with 64 other men and lives with the constant threat of violence.
Lewis is not the first agent in California to be tried for theft in an annuity sale. Glenn Neasham in Lake County was convicted in 2011 of grand theft for selling a fixed index annuity to an 83-year-old woman. The prosecutor alleged the client had dementia but Neasham and two of his assistants said they saw no signs of it.
The prosecutor argued that the client was deprived of access to her money because of the surrender charge.
The conviction was reversed in 2013 and “depublished” this year so that it could not be used as precedence. But Neasham in the meantime lost his business, insurance license and house. He and his family had to rely on food stamps. Although Neasham got his license back, he is just starting to rebuild a livelihood.
Few imagined that Neasham would have been convicted in that case. At that point, theft was usually associated with agents who used fraud to steal money directly from clients, especially elderly ones.
In the Neasham and Lewis cases, it is the surrender charge itself that constitutes the “theft.” The convictions could mean that if a sale can be considered unsuitable, instead of going to the state insurance department, agents can go straight to jail.
When that happens, not only do agents lose, consumers do also, according to Kim O’Brien, president and chief executive officer of the National Association of Fixed Annuities (NAFA). She said she was not necessarily defending Lewis’ sales practices, but maintained that a conviction would have consequences for all agents and consumers.
“A determination by the court that selling an annuity with a surrender charge is tantamount to embezzlement or common theft – and if the sale occurs at the client’s home, with burglary – would have a chilling effect on the ability of consumers to have access to fixed annuities,” O’Brien said in a statement from the association of fixed index annuity companies.
Lewis has not been able to contact his ex-wife and sons directly. That is especially troubling because his older son tried to commit suicide just before Lewis was jailed and he has not talked to him since his arrest.
“I don’t have direct contact to him now because my ex-wife doesn’t know what the heck is going on,” Lewis said. “When you’re stuck in these situations and you can’t get out of jail, you’re guilty, period.”