Neal Smalbach was fired by a broker-dealer in 2008 for selling securities while he was unregistered, an infraction that got him suspended by the
Financial Industry Regulatory Authority Inc. for six months, according to the organization's BrokerCheck system.
It was the second time that a securities firm had let him go.
But though he no longer had a securities license, Mr. Smalbach still had a license to sell insurance, and made good use of it — at least for himself, authorities said.
On April 29, Mr. Smalbach was arrested in Florida by the Pinellas County sheriff and charged with one count of insurance fraud and one count of organized fraud. Each count carries a maximum of five years in prison, along with a potential $5,000 fine.
The charges of insurance fraud against Mr. Smalbach, who also has 37 pending customer disputes from his time as a broker, according to BrokerCheck, highlight a persistent problem in the investment advice business:
Registered representatives who permanently or temporarily lose their license to sell stocks, bonds and mutual funds often retain a license to sell insurance.
Although state agencies that regulate insurance agents and securities brokers try to work together to keep an eye on brokers who get booted from either side of the industry, regulators are sometimes limited in their authority because of a lack of information sharing about reps and agents, observers said.
And a common criticism among registered reps is that insurance agents who lose a license to sell securities products often sell equity-indexed annuities, an insurance product that is nonetheless marketed as an investment that can compete with a mutual fund or variable annuity.
“It's been an issue, and still is, among states,” said Joseph Borg, director of the Alabama Securities Commission. “If you've been kicked out of one end of the financial markets, you probably don't need to be in another.”
Mr. Smalbach, 48, was pitching mortgage insurance policies that promise to pay the balance of a policyholder's mortgage in the event that he or she dies, according to Jeremy Powers, an assistant state attorney in Florida's Fifth Judicial Circuit. But instead of mortgage insurance, Mr. Smalbach's clients were, in fact, sold whole-life policies that were worth no more than $20,000.
“Somebody who's had the level of problems that [Mr.] Smalbach appears to have had would create a risk for consumers,” Mr. Powers said. “The activities alleged in this case are pretty serious and had the potential to create multiple hundreds of thousands of dollars in victim losses.”
Mr. Smalbach's attorney, Michael O'Haire, said the charges against Mr. Smalbach are in “the early stages” and that he is still examining the accusations against his client.
There is no way to quantify how many individuals continue to sell insurance products after losing a securities license.
But the charges against Mr. Smalbach, whose sales practices were profiled last month by the St. Petersburg (Fla.) Times, serve as a backdrop to efforts by lawmakers in Washington and regulators across the country to create a single fiduciary standard for investment advisers, registered reps and insurance agents.
This year, a law went into effect in Florida that gives the state's Department of Financial Services the power to revoke an insurance agent's license immediately if the agent has his or her securities license revoked.
“Fraud is fraud,” said Nina Ashley, a department spokeswoman.
When confronted with a broker whose securities license had been pulled — but who maintained an insurance license — regulators' hands are, at times, tied. To take actions against a broker's insurance license, Ms. Ashley said a specific insurance violation has to be found. “That didn't always exist,” she said.
Florida already has used the new law to revoke the insurance license of a broker who misrepresented information when selling securities to a senior citizen, Ms. Ashley said. In February, the Florida Office of Financial Regulation permanently barred Jeffrey Donner on charges that he failed to disclose to clients that their accounts would automatically be billed advisory fees of 30% annualized, according to a statement from the agency. Approximately $40,000 in management fees were deducted from clients' accounts.
While Mr. Donner neither admitted nor denied the findings, Florida regulators revoked his insurance license this month.
FINDING LOOPHOLES
Mr. Smalbach, however, still has a license to sell insurance products such as life and health policies, and variable annuities, according to the Florida Department of Financial Services' website.
Ms. Ashley declined to comment about any potential investigation into Mr. Smalbach's sale of securities or insurance products.
The broker in question exploited another loophole in the law when he sold stock in a firm called Transfer Technology International Corp., whose shares are currently listed at less than a penny a share. At least a dozen elderly investors, some in their 80s and 90s, bought nearly $1 million of the stock from Mr. Smalbach, according to the St. Petersburg Times.
Although he didn't have a securities license, Mr. Smalbach was an employee of Transfer Technology and could sell shares in the company to accredited investors legally, the newspaper reported.
SMOOTH OPERATOR
One longtime client of Mr. Smalbach who invested in the Wesley Chapel, Fla.-based company was Bob Fox, 78, of Sebring, Fla. A client of Mr. Smalbach's for over a decade, Mr. Fox said he has lost $100,000 in his Transfer Technology investment.
“He was a really smooth talker,” Mr. Fox said, adding that Mr. Smalbach often hurried him through paperwork when buying an investment.
Mr. Fox said he and other former clients of Mr. Smalbach are suing him and his former broker-dealers in a class action.
Mr. Smalbach's former accountant, Robert Ferreira, corroborated Mr. Fox's statement said the ex-broker often rushed clients through the process of buying investment products, including variable annuities.
“His method was to say, "Sign here, fill in this and that — I'm in a hurry and will fill in the rest at the office,'” Mr. Ferreira said.
E-mail Bruce Kelly at [email protected].
