A regulator in Massachusetts has charged LPL Financial-affiliated advisor Roger S. Zullo with fraud due to his sales of “unsuitable variable annuities to retirees and older clients” since 2013. In addition, Secretary of the Commonwealth William F. Galvin charged the independent broker-dealer with supervisory failure.
“For years, Roger S. Zullo, an LPL advisor, has defrauded his clients, lied to his supervisors and fabricated client financial suitability profiles, in order to enrich himself and LPL by selling scores of identical, illiquid and high-commission variable annuities,” according to the complaint.
The regulator’s office says that Zullo and LPL received more than $1,825,000 in variable annuity commissions over three years. About $1,791,000 of that came from commissions on the same product, the Polaris Platinum III (B Shares) variable annuity.
The Boston-based advisor “bypassed LPL’s paper-thin compliance review process for these sales by fabricating client financial suitability information, such as age and liquid net worth,” the 84-page complaint explained.
Galvin’s office says the vast majority of Zullo’s annuity sales were the Polaris Platinum annuities, which carry a 7% commission, which is split 90% for Zullo and 10% for LPL. In many instances, clients had to pay surrender charges when Zullo persuaded them to switch to the Polaris Platinum annuity.
Zullo, who joined LPL in 2004, has been in the industry since 1988 and has no disclosures previously, according to the Financial Industry Regulatory Authority’s BrokerCheck.
“For its part, LPL rewarded Zullo’s fraudulent practices and suspicious sales patterns with the accolade of a place in LPL’s ‘Chairman’s Club’ for top annuity production,” the complaint stated, “and actively disregarded and denied not only countless warning signs and red flags, but deliberate and specific supervisory attempts to escalate concerns with Zullo’s sales practices, as well as a written complaint made on behalf of a cognitively impaired senior citizens that affirmatively identified Zullo’s fraud.”
The regulator seeks to revoke Zullo’s registration as an adviser in Massachusetts and permanently bar him from the securities business in the state, while seeking restitution for those harmed.
It also asks LPL to retain an independent third-party investigator and compliance consultant to probe Zullo’s annuity sales and recommend improvements in LPL’s supervisory review process and client complaint resolution procedures.
The complaint highlights what happened to 11 clients who had worked in the health care industry. It adds that regulatory staff members have not finished their investigation of how others were affected.
“We take our responsibility to supervise very seriously and are committed to serving our investors. We are reviewing the matter and hope to work with the Massachusetts Securities Division to reach a full resolution,” LPL Financial said in a statement shared with ThinkAdvisor.
Commissions Before Clients
Galvin’s complaint argues that the advisor’s “greed for commissions at times led him to disregard the well-being of his clients,” including a single woman that he had known for 20 years “with no financial sophistication [and] no assets at her disposal except those in Zullo’s hands and no nearby family to assist her financially.”
The client bought a variable annuity in 2008 and relied on it as her main source of income. In 2015, she was older than 80, “experiencing cognitive impairment” and wanted to move into an assisted-living center. She met Zullo at a subway station to switch to a new annuity “with a fresh, seven-year surrender schedule,” the complaint says.
This cost her about $1,400 “and deprived the client of income she relied on to pay for the basic costs of living,” since the new annuity did not provide her of income for at least two years as a deferred product.
In the paperwork, the advisor claimed the client was 10 years younger than she actually was and had 10 times the liquid net worth than was the case. “LPL was on notice of both misrepresentations and should have taken immediate and decisive action to make the client whole and investigate Zullo.”
Other cases of fraud were similar, according to Galvin’s office. Another female client had bought a variable annuity in 2008 and was urged to switch, with a surrender charge, to the Polaris Platinum III in 2014. This client inquired about penalties if she “pulled out some of that money” and any penalties, since she had “no income coming in” at the time and large medical expenses.
Zullo’s supervisor did bring his repeated pattern of annuity sales and other concern to LPL, though no action was taken.
The rep had a disciplinary history at LPL, which included multiple fines over violations of document signature policy, variable annuity policy and use of an unapproved email address, the complaint says. “LPL stated that it hoped a $500 fine, for instance, would impress upon Zullo the importance of adherence to LPL Financial policy and all regulatory rules. It did not.”
In the case of the first client, a customer complaint was made on her behalf that was sent to the broker-dealer and to FINRA’s senior helpline.
“Despite of this, LPL’s ultimate response in September 2016 was to request that the client assist [it] in having the same Polaris Platinum annuity contract reissued, and in November 2016 to offer the client a settlement ‘solely as an accommodation’ while maintaining that the ‘purchase of the [Polaris] annuity was both suitable and appropriate.’”
The Massachusetts regulator concludes that allegations highlighted in the complaint show “Zullo cannot remain in the securities business.” Moreover, it “equally concerns LPL’s total failure to protect its customers from the prolonged and systematic fraud perpetrated by one of its major producers.”
As Galvin explained in a press release, “Betrayal of the trust of investors, especially older investors, retirees and those in the health care industry, is unconscionable behavior on the part of an investment advisor, and will not be tolerated. And this office will not accept a company’s abdication of its oversight responsibilities while the commissions accumulate.”
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