Arbitrators ruled in favor of a client of Principal Securities Inc. who claimed the firm placed their assets into unsuitable variable life insurance contracts and variable annuities, InvestmentNews reports.
The Financial Industry Regulatory Authority arbitration panel ordered Principal, an Iowa-based broker-dealer, to pay over $7.3 million to the Rosenau Family Research Foundation.
The foundation was established by two former Powerball winners to advance research into Krabbe Disease and Cystic Fibrosis. In a claim filed in 2022, they alleged that the annuity products they were sold were excessively traded to generate commissions, known as “churning”, and that they not informed of the products’ true investment costs.
The foundation said 99% its assets, managed by John Priebe, were invested in nonqualified variable annuities and eight life insurance policies, including products from John Hancock, Guardian, Pacific Life and Nationwide.
“A substantial portion of these investments were churned by Principal,” the complaint said. “Sales of the annuities and life insurance policies generated millions of dollars in revenue for Principal and Priebe.” The foundation claims it lost over $20 million through the investments. “The foundation assets were wasted because of unnecessary commissions, fees and costs that were paid to Mr. Priebe and Principal.”
The plaintiffs asserted a number of causes of action, including violation of federal regulations; violation of the Securities and Exchange Act of 1934; violation of FINRA rules; fraud; breach of fiduciary duty; negligence; breach of contract; and negligent supervision.
The FINRA arbitration panel did not give a reason for its decision. Along with awarding compensatory damages, they denied the claimants’ request for requests for punitive damages, treble damages and attorneys’ fees. They split arbitration costs and ordered claimants to pay $14,400 in hearing session fees and Principal $16,875 in fees, according to the award.
The foundation initially sought at least $20 million in compensatory damages.
Rosenau Family Research Foundation attorney Donald McNeil said, “The foundation is obviously very pleased with the results of this arbitration, and the money will be going towards research to find a cure for Krabbe disease and treatment for this neurological disease,” McNeil said.
The foundation’s executive director Gabriel Cohn added that the case showed that Prudential had violated its fiduciary duty by putting its own interest in driving up sales and commissions above what was best for the client.
“As a non-profit trying to find a cure for Krabbe disease, we expected our broker to provide an investment model that was prudent,” Cohn wrote. “Instead, the investment model had the foundation, a tax exempt entity, purchase over 21 variable annuities. Principal Securities had large supervisory lapses over these sales.”
“The evidence further reflected a pattern of churning, when these variable annuities were surrendered and then, 30-days later, a new variable annuity was purchased,” he added. “We maintained and proved that these surrenders and purchases were done to generate fees and commissions, and resulted in lost growth of the foundation’s principal in the millions.”
At Lewitas Hyman, our attorneys have handled hundreds of arbitrations before FINRA, , the Chicago Board Options Exchange, the Chicago Board of Trade, JAMS, the American Arbitration Association and other self-regulatory organizations nationwide. We have also appeared in courts throughout the United States in various types of securities-related matters. For more information about our arbitration and litigation services, please contact us at (888) 655-6002 or through our online contact form.
