Cadaret, Grant & Co., Inc.

Variable Annuity Fraud, Misrpresentation and Unsuitability FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.

March, 2012:

Cadaret, Grant & Co., Inc. (CRD #10641, Syracuse, New York) submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $200,000, and shall undertake to allow each of the living customers, involved in this matter, to rescind the purchase of each of the variable annuities (VAs) identified in this matter, by offering to rebate to each of the affected living customers the purchase price of his or her original investment, interest from the date of purchase until the effective date of this AWC, and any applicable surrender charges charged to the customer (except to the extent the firm already paid such surrender charges), less the amount of any income received on or withdrawals from the VAs. The firm further consented to undertake a comprehensive review of its policies and procedures concerning suitability of VAs and, within 90 days of Notice of Acceptance of this AWC, the firm’s director of compliance shall certify in writing to FINRA that the firm has engaged in a comprehensive review of its policies and procedures concerning suitability of VAs; as of the date of the certification, the firm has in place sufficient written policies and procedures designed to ensure compliance with its suitability obligation pertaining to VAs, including but not limited to the matters identified in this AWC. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that the firm, acting through one of its then registered representatives, recommended several unsuitable VA transactions to elderly customers. The findings stated that the transactions were unsuitable due to a recommended enhanced death benefit rider, which would provide only limited value and demonstrated that the representative did not understand or appreciate the significance of an age restriction or the reduced benefit of the rider when sold to a person close in age to the cutoff. The findings also stated that the firm failed to adequately respond to “red flags” concerning the representative’s VA sales. Prior to being associated with the firm, the representative had several customer complaints on her Uniform Application for Securities Industry Registration or Transfer (Form U4), some of which related to annuity sales. After the representative became associated with the firm, some additional customers filed complaints connected with VA sales, as reflected in amended Form U4s the firm filed. The findings also included that despite these complaints, the representative was never placed on heightened supervision and her VA transactions were never subject to greater supervisory review or scrutiny. The firm received actual notice that the representative had been the subject of a FINRA Wells Notice for unsuitable VA sales transacted at her prior firm, but the firm failed to heighten the representative’s supervision in any way. Some of the unsuitable recommendations took place after the firm received notice of the Wells.

FINRA found that the firm failed to have adequate systems and procedures to review VA sales. The representative’s supervisor reviewed and approved the representative’s VA transactions, which were subject to a second-level of review by the firm’s VA Department. FINRA also found that the firm failed to ensure that its supervisors, including the representative’s supervisor, were properly trained and knowledgeable about the VAs they were reviewing and approving. The second-level review process relied on a single reviewer, who reviewed a large number of VA transactions each day, in addition to performing other duties, and did not have any VA-specific surveillance or exception reports to assist in the review. In addition, FINRA determined that a VA log and a trading report failed to provide all the information necessary to assist supervisors in conducting a VA review. The VA log failed to have all the information necessary to conduct a suitability review and was not accessible to registered representatives or all of their principals. The trading report did not contain the information necessary for a principal to review a transaction for suitability and also failed to contain certain information necessary to comply with the firm’s own standards for reviewing the transactions in the report. Moreover, FINRA found that the firm failed to enforce its policies and failed to retain business-related emails for some of its representatives. Although the firm had a policy prohibiting the use of personal email accounts for business-related communications, the firm knew, or should have known, that certain of its representatives, including the representative who made unsuitable recommendations, her supervisor, and a third colleague in her branch, were using personal email addresses for business-related correspondence. The representative’s use of personal emails was known to her supervisor, who mistakenly believed that the firm’s systems captured such emails, but was also known to others at the firm, because, among other things, the representative communicated with the firm’s compliance department via personal email. (FINRA Case #2008015475201).