A Massachusetts-based investment advisory firm and its CEO were found liable for violating fiduciary standards but were cleared on more serious fraud charges, WealthManagement reported.
The split verdict followed a seven-day jury trial in the U.S. District Court for the District of Massachusetts in the case of Cutter Financial Group (CFG) and its founder, Jeffrey Cutter.
The trial stemmed from charges by the Securities and Exchange Commission in 2023 that Cutter recommended clients invest in certain annuity products without disclosing that his firm received “substantial, up-front commissions” from the insurance companies for each annuity sale.
After deliberating for about five hours, the jury concluded that Cutler and his firm breached Section 206(2) of the Investment Advisers Act, which makes it illegal for advisors to “engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.”
The jury did not find them liable under the anti-fraud provisions of Sections 206(1) and 206(4) of the Act.
In a statement, Samuel Waldon, acting director of the SEC’s Division of Enforcement, said: “We are pleased with the jury verdict holding Jeffrey Cutter and Cutter Financial Group, LLC accountable for breaching their fiduciary duties to their clients. As the hard work of the SEC team demonstrates, we will continue to hold investment advisers responsible when they engage in wrongdoing.”
The SEC’s complaint stated between 2014 and 2022, Cutter steered clients into fixed index annuities while withholding information about his commissions from the product of up to 8% of contract value.
Cutter allegedly replaced annuities for dozens of clients, including many he had previously advised to purchase the original policies. Many clients incurred surrender charges and forfeited previously accrued bonuses, according to the SEC, which contended the replacements were motivated by Cutter’s financial gain rather than clients’ financial situations.
Cutter reportedly earned over $9.3 million in commissions from 580 annuity transactions, with nearly $1 million attributed to replacements executed between 2018 and 2022. He also reportedly received more than $1.1 million from marketing firms for his annuity sales efforts.
In reaction to the verdict, Cutter asserted that the jury did not find violations of applicable SEC rules about compliance procedures but found that CFG was negligent in not disclosing the specific amounts of the commissions it received for some clients. The firm pledged to launch educational and compliance initiatives, including a campaign for clients to explain compensation structures.
“Today, the jury found what we have been saying for more than four years: that we did not intentionally or recklessly defraud any clients,” Cutter said. “These are claims that should never have been brought in the first place. It is very difficult for a small business to stand up to federal government regulators and prevail. But that’s what we did today.”
The attorneys at Lewitas Hyman were formerly senior attorneys in the SEC’s Division of Enforcement. We have represented clients in regulatory matters while working at Morgan Stanley and in private practice at some of the world’s largest law firms. Therefore, we understand the complexities that come with being the subject of a regulatory inquiry, and we have the experience to guide and advise you through any type of regulatory investigation. If you are the subject of a regulatory proceeding, contact Lewitas Hyman at (888) 655-6002 or through our online contact form for a free consultation.
