An advisory practice accused of fraudulently selling $40 million worth of variable annuities to federal employees lost to the SEC in court and also faces an ongoing civil action over the case.
Former LPL Financial registered representative Jonathan Dax Cooke and the practice he co-founded, Keystone Capital Partners, which did business as Federal Employee Benefit Counselors, face hearings on proposed remedies — including disgorgement of ill-gotten gains — after the jury in Atlanta federal court found them
Cooke and Keystone misled the federal employees into thinking that the costly products they sold to them as rollovers from their Thrift Savings Plan accounts were approved by the government or even affiliated with it, the SEC says. False statements to clients fall just below
“You really have to understand what the product is set up to do and how they put the thing together,” he said. “While the disclosures will tell you that if you spend the time to read them and if you can understand them — which can be difficult no matter how sophisticated you are — it's always good to sit down with whoever's selling you this and have them walk you through it.”
At the time that the SEC
LPL fired Cooke and two of the other ex-advisors in December 2014 while citing “concerns” about their communications with clients, according to their FINRA BrokerCheck files. Representatives for the firm didn’t respond to a request for comment on the jury’s verdict.
In a separate civil action, the advisory practice, Cooke and former office of supervisory jurisdiction manager Christopher S. Laws are facing allegations of “material breach of representations and warranties” in a 2016 sale of their financial planning business. The buyer, Scottsdale, Arizona-based Pinnacle Peak Private Client Group, accuses Keystone and the ex-brokers of failing to disclose the SEC matter despite provisions of their agreements stating that the practice faced “no claims, actions, suits, proceedings or investigations.” Pinnacle is seeking damages of at least $2 million.
Attorneys for the parties in the case didn’t respond to requests for comment. Under a January ruling that Pinnacle is currently appealing, a judge in Atlanta ruled that the case should be moved to the Phoenix federal court with respect to two counts and to the district court based in Macon, Georgia, for the third count.
“Certainly, the parties in this case did not draft their contracts in such a way that avoids piecemeal litigation or promotes judicial economy. Instead, the parties agreed to resolve some disputes in [the] plaintiff’s home state and other disputes in [the] defendants’ home state,” Judge J.P. Boulee wrote in the ruling. “When [the] plaintiff entered into multiple contracts containing different forum-selection clauses, it knew that there was a possibility that it could face litigation in several different districts, depending on which contract was breached.”
The underlying allegations in the SEC’s case revolve around how the regulator says Keystone and Cooke sold the costly products to clients. The “doing business” name of Federal Employee Benefit Counselors, an eagle logo for the practice resembling the official seal of federal agencies, misleading comparisons with a life annuity that was already offered through the TSP and the use of portions of actual TSP forms in their rollover documents created “the false impression that their investment was affiliated with or approved by the TSP,” the SEC says.
“In truth, the variable annuities that defendants offered and sold were privately issued, separate and apart from the TSP and the federal government, and had much higher costs than alternatives available through the TSP,” the complaint states. “Moreover, the representatives had no affiliation with, and were not approved or vetted by the federal government.”
In terms of the cost, the products sold by Keystone carried mortality, expense and administration fees of 1.3% and a rider fee of between 125 and 130 basis points, as well as an 8.5% surrender charge for any holdings withdrawn in the first seven years, according to the SEC.
The verdict holds Cooke and the firm “liable for fraudulently selling variable annuities to hundreds of federal employees who were at or near retirement age by falsely portraying himself and his company as counselors hired by the federal government to educate federal employees about their retirement benefits, and convincing them to roll over funds from their retirement accounts to fund the purchase of higher-fee variable annuity products,” SEC Enforcement Director Gurbir Grewal said in a
Jury members unanimously found Keystone and Cooke guilty of violations of anti-fraud laws, including a charge that Cooke aided and abetted breaches of the Exchange Act by LPL. After a telephone conference on March 23, the SEC has 45 days to file its motion and opening brief about the punishment in the case. The defendants will then get 30 days to respond to that filing, with another two weeks for the SEC to reply.
