Finra is investigating half a dozen independent broker-dealers that sold variable annuities with subaccounts invested in hedge funds that resulted in $18 million in client losses during the credit crisis.
H. Naill Falls Jr., a plaintiff's attorney suing the broker-dealers, said the Financial Industry Regulatory Authority Inc. contacted him a year ago about the sale of the product, a variable annuity issued by Sun Life Financial Inc.
The two hedge funds were the Foresee Strategies Insurance Fund and the Foresee Strategies 3(c)(1) Insurance Fund LP, which were related to a group called the SALI Multi-Series Fund LP, Mr. Falls said.
“The regulators have been investigating the sales of these funds,” he said. “Finra said it was investigating.”
The broker-dealers that have faced Finra arbitration complaints from investors regarding the Sun Life annuities include: Geneos Wealth Management Inc., Lincoln Financial Network, National Planning Corp., SagePoint Financial Inc. and FSC Securities Corp., Mr. Falls said.
“Lincoln had the most people in it, and the average investor had close to $500,000,” he said, adding that he has about 50 clients who incurred losses.
Another broker-dealer that sold the product has shut down, according to Mr. Falls.
He said he had never seen hedge funds used in variable annuity subaccounts before, pointing out that SunLife has dropped out of the variable annuity business altogether.
Finra spokeswoman Michelle Ong would say only that the brokerage industry's self-regulator does not confirm investigations.
Tom Nieman, chief financial officer of SALI Fund Services, said he had no comment about the litigation stemming from the variable annuity subaccounts.
A Finra arbitration panel issued a $284,000 award last week to a SagePoint client, Phillip Sherrill, who filed a claim against the firm last year. His arbitration complaint alleged unsuitability, common law fraud, breach of fiduciary duty and negligence related to investments in the SALI Multi-Series Fund and the SALI Multi-Series Fund 3(c) (1) LP.
“Foresee was a very obscure operation managing money, and it began to work with SALI,” Mr. Falls said. The SALI business helped administer and manage small hedge funds seeking to be placed in annuity subaccounts, he added.
Linda Skolnick, a spokeswoman for SagePoint and FSC Securities, did not return calls requesting comment. A Lincoln Financial spokesman, Charlie Sahner, said the firm had nothing to say about the matter. National Planning spokeswoman Melissa Hernandez said the company did not comment on pending litigation.
Russ Diachok, CEO of Geneos, said the firm had minimal exposure to the product, which he characterized as a private placement in a variable life product.
“We had one adviser with one case and settled that six months ago,” he said, adding that he could not comment further because of the confidential nature of the settlement.
SunLife spokesman Tim Stone said the company had no comment.
“It was unbelievable these funds got off the ground,” Mr. Falls said. The subaccount manager's strategy was to invest in options in the Standard & Poor's 500 Stock Index, and to use both put and call options, known as a “strangle,” he said. “The hope was the market doesn't move very hard in one direction — the strategy was a bet against volatility.”
According to Mr. Falls, the fund was put together in 2004 to 2007, which he called a period of low volatility. The strategy collapsed when the market crashed beginning in September 2008 and then rebounded sharply in March 2009. One fund lost 90% of its value; the other lost 75%.
Three of the broker-dealers have resolved litigation, he said, with more to come against SagePoint and National Planning. Investors are also suing Sun Life Financial in state court in Tennessee.