Customer Loses FINRA Arbitration Over VALIC IncomeLOCK Annuity Option

November 10, 2010

In a FINRA Arbitration Statement of Claim filed in September 8, 2009, public customer Anil Chawla complained about alleged losses that he sustained through the purchase of VALIC variable annuities.  In seeking $220,000.00 in compensatory damages plus additional punitive damages, Claimant Chawla alleged cause of action for  misrepresentation, unsuitability, negligence, fraud, and failure to supervise. In the Matter of the Arbitration Between Anil K. Chawla, Claimant  vs. Carol A. Ring, Greg Albert Libutti, and VALIC Financial Advisors, Inc., Respondents (FINRA Arbitration  09-05270, November 4, 2010)


VALIC at  routinely describes itself as follows:


For more than half a century, VALIC has served as a leading plan provider for higher education, K-12 schools and healthcare institutions. As of December 2009, VALIC has over $59 billion in assets and manages plans for nearly 25,000 groups, serving more than two million plan participants. VALIC represents The Variable Annuity Life Insurance Company and its subsidiaries, VALIC Financial Advisors, Inc. and VALIC Retirement Services Company.




The "transaction" at issue in this arbitration relates to the implementation of an "IncomeLOCK" rider on two existing VALIC variable annuity accounts, which were among some five accounts Claimant Chawla held with VALIC as part of his Massachusetts Optional Retirement Program. The Claimant had owned the subject variable annuities since approximately 1996, which were non-discretionary and from inception, Claimant had self-managed the securities and other positions within the annuity.


See, VALIC's online explanation of its IncomeLOCK option at  


Claimant Signs Contract


On or about April 3, 2008, Claimant met with VALIC Representative Ring and during this meeting Respondent Ring fully explained the provisions, workings, and applicable fees of the "IncomeLOCK" rider. Accordingly, Claimant then signed a formal written contract implementing the IncomeLOCK Rider on the covered accounts.


Notwithstanding Claimant's testimony at the FINRA hearing that he did not have a copy of the prospectus or contracts for the transaction, Claimant was apparent unable to affirmatively state that  he never received them, and  he acknowledged in his testimony that they may have been left on the table at the end of the meeting. Respondent Ring apparently testified that she was certain that said documents were provided to Claimant. Based upon testimony and evidence, the FINRA Panel concluded that the documents were provided to Claimant.


What The Rider Said -- Or So Respondents Say -- And So Claimant Questioned


The IncomeLOCK rider provided that


·         in return for an annualized fee of 65 basis points (.065% of the Benefit Base),

·         assessed quarterly (4 payments with a cumulative total of .065%),


Claimant Chawla would receive, among other benefits, a guarantee of


·         withdrawals up to a specified amount from your portfolio Director Variable Annuity even if your account value falls to zero as a result of adverse investment performance and previous withdrawals.

·      Lifetime Income: You will automatically be eligible to receive lifetime withdrawals if you begin withdrawals on or after your 65th birthday and your withdrawals do not exceed the maximum annual withdrawal percentage of 5% in any benefit year.


According to Ring, the rider provided that the lifetime withdrawals were based on the


·         higher of the account values either on the date of signing the rider, or

·         on a subsequent anniversary date.


No further contributions to the account were permitted, and, so long as the rider remained in effect, each year, on the anniversary date, Claimant's benefit basis would increase if the value of the securities on that date had increased above the last "locked in" benefit basis amount.


Thus, the benefit basis amount could never fall below the amount existing on April 3, 2008, but could go higher. As explained by Ring, this allowed for investing the annuities' subaccounts in higher yield/higher risk positions with no detrimental effect on the payout, at least as it existed on April 3, 2008, allowing further for a potential higher benefit base with each succeeding anniversary date.


Shortly after April 3, 2008, Claimant directed that the subaccounts in these variable annuities be reallocated to higher risk investment positions.


Claimant is Correct. Respondent is Correct.


Notwithstanding the documentation and referenced explanations by Respondent Ring, the FINRA Panel concluded that Claimant Chawla did not understand the IncomeLOCK rider. However, the Panel also concluded that Respondent Ring believed that Claimant understood her explanations of the rider. The Panel accepted both circumstances as factually correct - the customer did not understand the rider but the broker believed that he did.


Although it would seem that the Panel had set itself up for accepting two irreconcilable facts, the impasse was resolve when the Panel found that Claimant's misunderstanding was self-induced, in that, as Claimant testified, he chose not to read the IncomeLOCK rider contract either before or after he signed it. Moreover, the Panel gave weight to the fact that Claimant never communicated his failure to inform himself of the rider's provisions to Respondent Ring.


The Panel considered Claimant's testimony that he did not examine his monthly statement for the April-June 2008 period, which showed the application of the 65 basis point fee for each account.  Further, the Panel pointedly noted that directly above Claimant's signature on the rider is the following admonition:

The undersigned owner acknowledges that he/she has read and understands the above items, has received a copy of this acknowledgment for the IncomeLOCK living benefit option. This disclosure is not intended to be a full description of benefit. Please refer to the Portfolio Director Variable Annuity prospectus for complete details.
(Emphasis added by Arbitrators)

Shortly  after April 3, 2008, Claimant advised Ring that he did not understand some aspects of the rider. The Panel noted that Respondent Ring provided a further explanation which Claimant apparently accepted - thus further buttressing the Panel's finding that Respondent Ring believed that Claimant understood the product.


In September, 2008 Claimant finally advised Respondent Ring that he did not have a prospectus, or a copy of the rider contract, and Ring provided those materials. While such a scenario might weigh favorably in a public customer's favor in such a case as presented here, the FINRA Panel focused on the fact that during the period between April and September 2008, Respondent Ring did not know that Claimant did not have a copy of the IncomeLOCK rider or of the Prospectus/Brochure. 


Finally, the FINRA Panel seemed to have difficulty understanding the measure or basis for Claimant's alleged damages.  The Panel noted that Claimant had five account but that only the IncomeLOCK related issues on the two annuities were addressed at the hearing. The Panel characterized some of the damages sought as based on an


[i]rrelevant, if not speculative,calculation of an alleged diminution of the total value of his entire five accounts. For this aspect of damages Claimant has apparently chosen a date in 2009 when his cumulative, five account total was in the approximate amount of $210,000.00. He apparently subtracts this from an unsupported, unidentified and unknown, alleged total account value. Although an account value figure of $326,000.00 was referenced, Claimant did not present any competent evidence to support this figure or this aspect of his damages. The Panel rejects this calculation as unrelated to the two accounts, and to the related issues addressed at the hearing. No expert testimony was presented, and the damages claimed could not be subdivided or pro-rated to the subject accounts. . .


The history of this dispute apparently included Claimant Chawla's filing of complaints to his UMASS Pension Office, and to the Massachusetts Attorney General's Office. In response to those complaints, the Respondents agreed to annul Claimant's election of the IncomeLOCK rider; however, that concession did not extend beyond the annulment and an agreement to provide compensation to Claimant for any alleged losses. The FINRA Panel voiced its belief the the denial of compensation was proper.


Motion to Dismiss


In June 2010, Respondent Libutti filed a Motion to Dismiss, which the FINRA Arbitration Panel denied without prejudice in June 2010, with permission to re-file at the conclusion of Claimant's case in chief.  Thereafter, when Claimant rested his case (Claimant represented himself pro se), the FINRA Panel granted  Respondent Libutti's renewed Motion to Dismiss.


Panel's Decision


In consideration of the above, the FINRA Arbitration Panel found that  Claimant was not entitled to any recovery, and that he made no attempt to mitigate any of his alleged damages.The Panel further concluded that the evidence supported a finding that Claimant's lack of understanding of the IncomeLOCK product was


a direct, proximate, and specific result of his failure to read the contract that he signed, or to examine his account statement for the April-June 2008 period, and of his further failure to advise Respondent Ring that he did not have the documents until September 2008. Thus, the Panel is unable to conclude that the IncomeLOCK rider was not a suitable product for Claimant, and finds, specifically, that it was suitable. The Panel finds that the Claim, as set forth by Claimant, is wholly lacking in merit.


Accordingly, the Panel dismissed with prejudice Claimant's claims. 




Further The Panel recommended the expungement from Respondent Libutti's Central Registration Depository (CRD) record of all reference to this arbitration. Pointedly, the Panel determined that Respondent Libutti took no part in the transaction which formed the basis of this arbitration. His sole connection with the issue was to respond to Claimant's complaint against Respondents Ring and VALIC. Respondent Libutti was not the registered person involved in the transaction at issue in this arbitration.


In a somewhat unique action, the FINRA Panel, on its own initiative, recommend the expungement of this arbitration from Respondent Ring's CRD records.  Why a Motion for Expungement was not made on Ring's behalf is a bit puzzling to me and the FINRA decision does not explain this somewhat odd omission. The Panel concluded that Respondent Ring did


[n]othing improper in the sale of the IncomeLOCK rider to Claimant, and that she rightfully believed that Claimant understood what he was buying. Ring breached no fiduciary duty to Claimant, and did all that could be expected to be done by a reasonably prudent financial adviser, under the circumstances herein. Ring made no commission or received any other financial benefit from the implementation of the rider. The claims against her are totally lacking in merit, and essentially false. The Panel notes, that given the unsupported, base, and wanton allegations of fraud, misrepresentation and other alleged intentionally deceptive actions, were this claim to have been filed by an attorney, and not a pro-se, lay litigant, this arbitration could rightfully be classified as frivolous.


Bill Singer's Comment: Frankly, this is one of the most fascinating FINRA Arbitration decisions that I have read in many, many years.


First off, let's be clear - VALIC has been named in the past and is apparently presently defending against individual and class action lawsuits citing misconduct in connection with the sales of annuities.  Consequently, there may or may not have been some merit in Claimant Chawla's allegations - that he chose to proceed pro se may certainly have hamstrung the presentation of his case.  On the other hand, based upon the exemplary nature of this FINRA Panel's Decision,  and giving full weight to the Panel's  detailed explanations and findings, it would appear that VALIC and/or its representatives did not engage in misconduct in this case.


Second, the sales of and the sales practices attendant to variable annuity sales have long been the subject of lawsuits and regulatory concerns.  Until such time as the documentation delivered to consumers is made more intelligible and uniform (that is, more consistent among various providers of VA's and less idiosyncratic by each company), consumers will continue to be bedeviled by legalese and head-scratching explanations.  Nonetheless, as the FINRA Panel underscored, you should never sign anything when you don't understand what you've bought or what you've agreed to.


Finally, this FINRA Panel is to be congratulated for explaining this nuanced dispute and for connecting the dots in a manner that provides an intelligible rationale for the case's outcome.