The U.S. District Court for the District of Massachusetts entered a final judgment on Feb. 10 against Massachusetts-based investment advisor Jeffrey Cutter and his advisory firm, Cutter Financial Group LLC.
The judgment, which the SEC announced on Feb. 19, orders CFG to pay a civil penalty of $100,000 and Cutter to pay a civil penalty of $50,000.
After a seven-day trial last April, a jury found that Cutter and his advisory firm failed to disclose to their clients significant upfront commissions, among other conflicts of interest, as part of an annuity replacement scheme.
The judgment issued on Feb. 10 also requires Cutter and CFG to provide a copy of the judgment to all of their existing investment advisory clients and to all of their new investment advisory clients for five years and enjoins Cutter and CFG from future violations of Section 206(2) of the Investment Advisers Act of 1940 for five years.
The case stretches back to March 2023, when the SEC charged Cutter and his firm with defrauding clients, causing them to incur a total of $640,000 in annuity surrender charges between 2018 and 2022.
The SEC said Cutter and his firm recommended that their advisory clients invest in fixed indexed annuities that paid Cutter a significant upfront commission without adequately disclosing his and CFG's financial incentive to sell those products. At times, he recommended clients surrender an annuity he had sold them in exchange for a new contract in order to reap a second upfront commission, according to the regulator.
A jury in the U.S. District Court for the District of Massachusetts deliberated for five hours, finding last April that Cutter and his firm were liable for violating Section 206(2) of the Investment Advisers Act of 1940, which prohibits "engag[ing] in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client."
The jury found for Cutter, however, on claims the SEC alleged under Sections 206(1) and (4) of the Act, the antifraud provisions.
In July 2023 Cutter requested that the case be dismissed, arguing that, among other things, he was acting as an insurance agent and not as an investment advisor in these instances — and, thus, he did not violate the Investment Advisers Act of 1940.
The National Association for Fixed Annuities and Investor Choice Advocates Network filed amicus curiae briefs in the court in mid-2023 on Cutter's behalf.
Cutter said last April that "There were no allegations that client funds were misappropriated," and the firm "acknowledges that industry-based financial advisory disclosures can be complex."
To help clients "better navigate these structures, the firm will be launching educational and compliance initiatives, including an educational campaign to explain compensation structures in accessible terms," the firm said at the time.
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