Missouri says Otto set up unregistered brokerage to liquidate client accounts; he settled similar charges with SEC this year
Missouri's secretary of state slapped a former Bankers Life and Casualty Co. insurance agent with a cease-and-desist order, alleging that he used an unregistered in-house brokerage to help liquidate clients' accounts and use the proceeds to buy annuities.
The agent, James E. Otto of Overland Park, Kan., has 30 days to respond to the order and request a hearing.
Mr. Otto is not registered to sell securities or provide investment advice.
The regulator alleges that the agent hatched an elaborate plan in 2004 to help Bankers' agents liquidate clients' brokerage accounts. According to the secretary of state, Mr. Otto opened accounts for customers at a pair of discount broker-dealers and transferred clients' assets into those accounts.
Customers would give Mr. Otto limited trading authority over the new accounts, which he would then liquidate. He then transferred the proceeds to Bankers by purchasing indexed annuities and other products, according to the cease-and-desist order.
The two broker-dealers — one headquartered in Rhode Island and the other in Nebraska — were not named in the order because they are under investigation, said Abe Rakov, spokesman for the secretary of state.
This so-called in-house brokerage business, which was not registered as a broker-dealer, liquidated some $7.1 million in securities in more than 180 customer accounts, according to the state.
Between May 2004 and August 2006, Mr. Otto allegedly made presentations to Bankers insurance agents on the in-house broker. The state claims he took a cut from those agents who used the “service,” getting either 10% of their commission from the annuity sale or a flat fee of $150 — whichever was higher, according to the order.
After Mr. Otto resigned from Bankers, he reached out to his clients there and talked to them about trading in their Bankers annuities for new annuities, according to the order. About half of the annuities sold through the in-house brokerage were surrendered, racking up more than $270,000 in charges.
Bankers Life is paying $574,000 in restitution to 100 investors who were caught up in the alleged scheme. Many of those investors are elderly.
News of the cease-and-desist order was first reported in the Kansas City Star.
Last fall, the Securities and Exchange Commission slapped Mr. Otto with a cease-and-desist order for a similar scheme — this one, allegedly involving TD Ameritrade Holding Corp. and a second, unnamed, broker-dealer. The securities regulator accused Mr. Otto of acting as broker-dealer and adviser without being properly registered. The SEC also alleged that he contacted TD Ameritrade, impersonating one of the clients.
In May, Mr. Otto settled with the SEC without admitting or denying the findings and was ultimately barred from associating with any broker-dealer or investment adviser.
A call to Mr. Otto was not immediately returned.
