It was supposed to be a gotcha moment for AXA Advisors in a $13 million arbitration fight with two former clients. But it turned into a gotcha for the clients when arbitrators found themselves listening to a recording of a fraud taking place.
James and Sandra Fitzpatrick, a retired New York couple who’d saved $20 million from running a large egg farm, claimed to have been taken advantage of by their AXA financial advisor. They accused him and the firm of negligence and other misconduct.
AXA disputed the allegations and its defense relied in part on arguments that the clients and their son and trustee Kerry Fitzpatrick were more savvy investors than they’d let on.
Before a panel of three FINRA arbitrators, AXA’s lawyer played what he said was a recording of the son speaking with customer service and demonstrating sophisticated investing know-how. But it wasn’t the son on the phone call.
That moment and the underlying case provide an unusual glimpse into how FINRA’s arbitrations, which are closed to the public and the media, can make it easier for a financial firm to take one position in private to try to limit damages, while maintaining a different one in public.
"When you're in a neutral, open court," says Remington Gregg, an attorney with the consumer advocacy group Public Citizen, "there is transparency in the proceedings and transparency as relates to the decision. You have neither of those things when it comes to arbitration. … Companies are able to have two different positions.”
In response, the brokerage industry’s self-regulator says: “FINRA arbitration strives to provide the fairest and most efficient forum for parties — investors, brokerage firms and individual brokers — to resolve their securities-related disputes. While arbitrators and FINRA staff are bound by confidentiality, the parties and their counsel may share pleadings, documents, transcripts and any other information about their case … and often do.”
The Fitzpatricks, who live in Whitesville, New York, about 100 miles southeast of Buffalo, had been AXA clients for about 30 years when their longtime advisor retired and, in 2011, the company assigned a successor: Francesco Puccio.
Puccio, 46, who said he was struggling at the time to pay back taxes to the IRS, sold the Fitzpatricks two “unsuitable” life insurance policies, two variable annuities and one fixed-income annuity that were no more than “commission grabs” to bolster his sagging finances, the couple said in an arbitration claim in November 2016. The Fitzpatricks sought damages from AXA for negligence, misrepresentation and breach of fiduciary duty.
The couples' road to arbitration started when their son and daughter saw Puccio’s mugshot in the newspaper. He had been convicted in January 2016 of larceny for stealing more than $100,000 from another client, a retired custodian named Shirley Kerwin.
“He did real fine for a while,” Kerwin said of Puccio’s efforts the first couple of years managing more than $400,000 she and her late husband, a truck driver, had saved for retirement.
‘I BROKE THE LAWS’
That was before, she alleges, he put her in a series of unsuitable variable annuities. He then persuaded her to make several loans totaling more than $100,000 to one of his friends. Puccio told her the repayments would provide her with a steady income stream, according to both Kerwin and Puccio. He sold her the policies while was working at AXA and set up the loans after jumping to a new IBD, Cambridge Investment Research.
What he didn't tell her was that he, not the friend, got the money, Puccio acknowledges.
One day, "he came to my house and told me that my money was all gone," Kerwin said. "That was when I hit the floor. … I asked him, 'Well, where did it go?' "
Puccio told her she had spent it all by giving too much money to her brother, who suffered from lung cancer. "I was actually stunned," says Kerwin, adding that she knew she had not given her brother all of her savings.
Though he disputed details of their conversation, Puccio told Financial Planning last month that, "With Shirley, I made a big mistake. I broke the laws.”
Kerwin did something that few victims of theft or fraud by their advisors wind up doing: She called the police. Puccio was arrested in July 2015 and, the following January, convicted of second-degree grand larceny.
Sentenced to five years probation, he committed to paying Kerwin $500 a month for five years until March 2021, according to her lawyers who represent her and the Fitzpatricks. His payments are often late, according to court documents, Kerwin and Puccio himself, who offered a variety of explanations as to why. For several years, the money Puccio sent Kerwin was her only source of income beyond a monthly Social Security check, she says.
One month after his arrest,
It wasn’t until the tail end of 2017 that FINRA convened an arbitration panel to resolve the Fitzpatricks’ claims against AXA. The case unfolded over nine days of hearings that stretched from February to November 2018.
"I'm going to play for you a recording of a conversation that you had with AXA's customer service," AXA’s lead counsel, Joseph Simms, told Kerry Fitzpatrick on the first day of the proceedings, according to a transcript obtained by Financial Planning.
Seconds into the recording, Fitzpatrick blurted out, "That's not me!"
It actually was Puccio on the recording, not only impersonating Kerry Fitzpatrick, but providing a gmail account in the name of Fitzpatrick's father, where AXA could send documents.
"That's a fraud, right?" the Fitzpatricks' lawyer Jason Kane asked Puccio later in the hearing.
"If you say it's a fraud, I guess it's a fraud to help the clients, yes," Puccio responded.
Fitzpatrick, in an interview with Financial Planning, says, "At no time did I tell Mr. Puccio that it was alright to impersonate me or contact AXA on my behalf." Puccio disputed that in his interview with Financial Planning.
QUESTIONED BY STATE POLICE
Puccio had called AXA with his ruse the day before the advisor sold the Fitzpatricks an insurance policy for a large commission, according to the couple’s lawyer and documents from the case. Puccio posed as Kerry Fitzpatrick, the couple’s lawyers contend, in order to ensure the man's parents had enough money to pay for the new policy he sold them in his new job with Cambridge.
Seven months prior to placing the call, Puccio was questioned by a state trooper while he was visiting Kerwin’s house; he was arrested nearly a year later. The Fitzpatricks believe the commission on the new policy allowed Puccio to pay restitution to Kerwin and keep him out of prison. In effect, Puccio robbed Peter to pay Paul, Kane contends. Puccio denies this and maintains the policies he sold to the Fitzpatricks were suitable.
The revelation about Puccio’s impersonation of his clients’ son and Puccio’s criminal status did nothing to dissuade AXA from a wholehearted defense against the Fitzpatricks’ arbitration claim. Puccio's treatment of them was "beyond reproach,” AXA’s lawyer Simms repeatedly told the arbitrators.
"AXA did what it was supposed to do here," Simms said in his closing statement in the arbitration. "It provided reasonable and suitable recommendations. It properly executed the transactions and it properly supervised Mr. Puccio in the process. Yes, Puccio had financial issues. Yes, he received large commissions on these five transactions. Yes, there may have been other choices for the Fitzpatricks. … Puccio provided practical solutions for them."
In April, the arbitrators came to a different conclusion about AXA’s conduct, awarding the Fitzpatricks $3.2 million to recover their losses and legal fees, while denying punitive damages. The couple had requested $13 million. Arbitrators hired by FINRA aren’t required to provide explanations for their rulings.
Last month, AXA released a statement that struck a very different tone than the one it had maintained before.
"We do not condone any actions by this individual, which were inconsistent with our policies and values,” it says. “The financial professional who was involved with this matter has not been affiliated with the company for more than five years."
After news of the FINRA decision in the Fitzpatricks' case, AXA settled Kerwin's FINRA case two months ago for $130,000, according to BrokerCheck.
In 2014, before his arrest, Puccio resigned from AXA, where he worked for 13 years, to join Cambridge, where his abuses allegedly continued. Cambridge discharged him in 2015 two days after his arrest, according to FINRA BrokerCheck records. Cambridge settled a separate case with the Fitzpatricks more than a year ago for $115,000, according to BrokerCheck. A Cambridge spokeswoman declined to comment.
CLIENTS’ WELL-BEING IS AXA’S ‘TOP CONCERN’
Kane and his co-counsel Joseph Peiffer say they have detected systemic problems with AXA advisors in upstate New York, referring to five cases against the firm over the past 15 years that led to $24 million in fines. The cases span actions by FINRA, the New York Department of Financial Services and the New York Department of Insurance.
"While [the Fitzpatricks’ case] was the work of a financial felon, that felon worked within an atmosphere at AXA that allowed him to do it,” Kane says.
AXA refuted point-by-point all the arguments Kane’s law firm have lodged against it in an eight-page cease-and-desist letter sent to the firm.
“Mr. Puccio’s conduct by no means reflects a ‘larger pattern of bad behavior’ among AXA Advisors’ thousands of associates, nor is the Fitzpatrick case part of any such alleged pattern,” the letter says. “AXA Advisors does not ‘expose’ its clients to individuals with ‘multiple red flags,’ and it promptly addresses any concerns related to its brokers. Its clients’ well-being is AXA Advisors’ top concern,” the letter adds.
A review of FINRA BrokerCheck records shows that, of 336 brokers in Buffalo, Rochester and Syracuse, the three largest offices in AXA’s Empire division in upstate New York, 54 have regulatory disclosures — 16% of AXA’s FINRA-registered workforce in the area. Numerous brokers have multiple disclosures, which are all required by FINRA: personal financial problems, including bankruptcy or unsatisfied debts; complaints involving variable annuities; as well as criminal charges or convictions for offenses such as burglary, assault, criminal possession of a loaded firearm and identity theft.
“We have strict hiring and supervisory policies for all financial professionals,” an AXA representative says of the disclosures. “If a professional does not meet our high standards of conduct, we take swift action up to and including termination. While BrokerCheck is an important source, it does also contain disclosures that have been proven to be without merit.”
In an hour-long interview, Puccio, who says he now works in commercial lending, called one of the attorneys of his former clients "a predator" and said that, aside from Kerwin and the Fitzpatricks, none of his roughly 1,100 clients at AXA complained about him. (There are no other client complaints on his BrokerCheck record.)
As for Kerwin, he says, “I’m very sorry about what happened. I wish I could go back in time.” But he also says, "I have a problem with lying."
During his years with AXA, “The fact is, with all the audits that they did in my long career with them, they never found anything wrong." When it came to the Fitzpatricks, he says, a long chain of AXA managers reviewed and approved the policies he sold them.
"If you think it was that bad, then don't sign off on it," Puccio says of AXA. "If I did something wrong, then I should have been stopped."
