Former LPL Broker Fined and Suspended For Widow's Variable Annuity and Mortgage Activities

June 20, 2012

WEST PALM BEACH, FL - AUGUST 27:  People looki...

WEST PALM BEACH, FL - AUGUST 27: People looking to restructure mortgage loans wait in line to be let into a Neighborhood Assistance Corporation of America's 'Save the Dream' tour stop at the Palm Beach Convention Center on August 27, 2010 in Palm Beach, Florida. The tour, which makes stops around the United States, has on hand hundreds of mortgage counselors from various mortgage companies. (Image credit: Getty Images North America via @daylife)

In response to the filing of a Complaint on July 12, 2011, by the Department of Enforcement of the Financial Industry Regulatory Authority ("FINRA"), Respondent Jerod A. Wurm submitted an Offer of Settlement dated May 31, 2012, which the regulator accepted.  Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, Respondent Jerod A. Wurm consented to the entry of findings and violations and to the imposition of the sanctions. FINRA Department of Enforcement, Complainant, vs Jerod A. Wurm, Respondent (Offer of Settlement 20080153649-01 June 13, 2012).

From May 2003 through October 22, 2010, Respondent Wurm was registered with LPL Financial, LLC as a General Securities Representative, General Securities Principal and General Securities Sales Supervisor.

A Widow's Future

In February 2006, a 53-year-old widow who worked as an administrative assistant for a public school district where she earned about $56,000 annually became Wurm's customer.  The customer told Wurm that she intended to retire about age 60, at which time she expected to receive both a pension and Social Security benefits. At the time of her account opening, the customer:

  • owned a home free and clear that was valued at approximately $500,000.00;
  • had an investment portfolio valued at approximately $160,000.00 in various retirement accounts;  and
  • had about $100,000.00 in certificates of deposit.

In consideration of the above factors, Wurm prepared two projected cash flows for the customer: one assuming that she mortgaged her home and the other assuming that she did not.  The underlying assumptions in the cash flows were a 7% annual return coupled with a 3% rate of inflation. As a consequence of the projections, Wurm demonstrated to the customer that she would have more money if she mortgaged her home and invested the proceeds - assuming that the 7% and 3% rates held up.

Mortgage Referral Fee

Following the customer's decision to mortgage her home and invest the proceeds, Wurm allegedly referred her to an affiliate of LPL, where she obtained a mortgage.  Wurm received a $1,225 referral fee. TheOffer of Settlement asserts that Wurm assisted his customer in obtaining the mortgage by providing services that included help in preparing the initial paperwork, acting as an intermediary, and discussing various loan amounts and terms.

Ultimately, on March 23, 2006, CM obtained a 30-year term $315,000.00 fixed rate loan at 6.125% per annum with a monthly payment of $1,913.97. Because closing costs were financed in the loan, the net proceeds were $310,828.74.

SIDE BAR: Although the Offer of Settlement does not name LPL's mortgage affiliate other than as "IM," it is my understanding that around 2004, LPL introduced a mortgage servicing program through Innovex Mortgage Company but ended the program around November 2007.

Annuity Commissions

Following discussions with Wurm, on April 4, 2006, the customer accepted his recommendation and invested $300,000 in mortgage loan proceeds in a MetLife variable annuity known as MetLife USA Series L, which Wurz further recommended be allocated to the MetLife Balanced Strategy Portfolio, with half the funds to be invested immediately and the other half to be invested through a dollar-cost-averaging program. Wurz allegedly received a of $4,725 commission for his customer's annuity purchase.

FINRA's Charges

FINRA alleged that Wurz's recommendation constituted a violation of NASD Conduct Rule 2310: Recommendations to Customers (Suitability) and IM-2310-2: Fair Dealing With Customers, and NASD Conduct Rule 2110: Standards of Commercial Honor and Principles of Trade.

In reaching that conclusion, the regulator asserted that Wurz was aware that his customer "was not financially capable of purchasing the recommended variable annuity without encumbering her primary residence to obtain funds to invest."  Further, Wurz allegedly knew and discussed with his customer that she would need her other investment assets (at the relevant time worth about $260,000) to make the required home mortgage payments.

The Offer of Settlement alleges that Wurz lacked a reasonable basis for recommending the customer's investment in the $300,000 variable annuity (as financed with the mortgage loan proceeds), particularly in light of the facts that the customer had:

  • limited current income,
  • wished to retire within seven years, and
  • would have a limited income in retirement (via her public pension and Social Security benefits).

Accordingly, FINRA alleged that Wurz should have known that should the customer's limited retirement income and liquid assets be insufficient to make her mortgage payments, the customer's home ownership could be at risk.

In accordance with the terms of the Offer of Settlement, FINRA imposed upon Wurz a $5,000 fine and a ten-business-day suspension from association with any FINRA member broker-dealer in any and all capacities for a period of ten (10) business days.

Bill Singer's Comment

For starters - and NOT as an excuse or justification - we need to keep in mind that the cited transactions occurred in the halcyon days of 2006, the proverbial calm before the storm.  Within that context, Wurm's conduct and recommendations take on a far less sinister and far more understandable complexion.  Those were the days of folks buying and flipping houses, or running up the mortgages on their bloated homes, and of dabbling in all sorts of exotic investments (which few understood).

A valuable, a very valuable, lesson that this case teaches us is that "context" ain't all that it's cracked up to be.  Sure, in 2006, everyone - and I mean everyone - routinely talked about 10% annualized returns.  Some of the more responsible industry professionals talked about 9%, 8%, and, omigod!, 7% annualized rates.  Since 1928 (as we all too often heard the purported savvy pundits proclaim), you could easily count on at least 9%.  That was until the onset of the Great Recession.  Now, perhaps, if we're being prudent, we might whisper about, maybe, 7%, perhaps, hopefully?  But don't examine that annualized rate too much because we have chunks of time where the return is negative.  Oops!

Whether you are a devotee of the Black Swan Theory or merely another hard-boiled cynic like me, you may now be counted among those who place little comfort in years of accumulated stock market statistics.  Nonetheless, when Wurm quoted the old 7%/3% assumed rates, I cannot point a finger at him for being reckless - it was simply a convention of the times, now, seemingly long gone.

As to the larger issue here, let us shine a light on it and show it in all its besmirched glory.  Wall Street's fetish with cross selling and embedding far too much of its customer dealings with all sorts of commissions, fees, and considerations to the registered person continues to raise uneasy questions about "conflicts of interest" - and certainly about the "best interests" of the customer.  A fair question in this case is whether Wurm was motivated, in whole or part, by the consideration of earning a fee on the mortgage loan transaction and a commission on the annuity purchase.  That is not addressed in this case and I'll leave it at that.

These tugs and pulls on the integrity of stockbrokers are not simply issues at an indie/regional brokerage firm such as LPL.  One merely needs to look back over the years and simply peruse current pay-out grids to see that such practice happened and happen at firms such as Citigroup, Morgan Stanley, JP Morgan, Wells Fargo, Bank of America, and others.  While fair compensation of one's honest labor is a bedrock principle of Capitalism, I would similarly argue that meaningful disclosure of such compensation to one's customer is not an incompatible principle.  While Wurm's customer may have been informed that he would receive a referral fee and a commission (we are not so advised in the Offer of Settlement), such disclaimers are not typically prominent.

Finally, missing from FINRA's Offer of Settlement is the revelation of whether and to what extent the customer was harmed by the now sanctioned mortgage loan and annuity investment.  I believe that such a disclosure - even if combining realized and unrealized losses - would be a valuable component in rendering this case more helpful to the public and the industry.