A Financial Industry Regulatory Authority (FINRA) arbitration panel awarded $1.7 million to a Texas man and the estate of his deceased wife, after finding that a former independent contractor at Raymond James Financial Services improperly managed their portfolio using life insurance and variable annuities.

In a May 10 ruling, the panel found that Raymond James failed to properly supervise Paul Davis as he sold the elderly couple life insurance and variable annuity products, according to Tracy Pride Stoneman, a Westcliffe, Colo.-based attorney who represented the Tylers.

Davis apparently sold the clients’ $3.8 million portfolio, which had been heavily invested in municipal bonds, and bought the annuities and life insurance products. At some point between 2002 and 2006, the broker exchanged one annuity for another.

“That is a huge red flag, because usually it does not make economic sense,” Stoneman said. “It incurred substantial penalties, and that is what in large part made the transaction unsuitable.”

The Tylers actually turned an $800,000 profit from Davis’ decisions, and willingly followed him to LPL Financial when he changed jobs in 2006, according to a statement emailed from Anthea Penrose, public relations manager at Raymond James.

“Subsequent trading at LPL and market forces resulted in the losses which formed the basis of the complaint,” according to the statement. Stoneman settled with LPL before the arbitration took place, in Dallas. 

Stoneman, however, says the problems grew more complex. Davis also leveraged the insurance policy to make other annuity purchases, which also made very little sense. Long after the accounts were closed, the Tylers were saddled with $2 million in outstanding loans on the insurance policy.

“Our main argument was my client was saddled with these long-term products that never should have been sold to him,” Stoneman said. “They were in a precarious situation.”

Davis also named the Tylers’ son as the annuitant on the annuity products. That fact came out after the son received a 1099 tax assessment of $1 million, and brought it up with his accountant. Stoneman says Davis later admitted in a letter to the younger Mr. Tyler that the transaction was a mistake and that he should not have been named as the annuitant on his father’s policy. The accountant later filed an amended tax return, to release the son from any tax liability.

“RJFS was disappointed by the award and is reviewing all available options,” according to the statement from Raymond James. The company might have very little recourse. Arbitration decisions are difficult to overturn and awards usually must be paid in 30 days of the decisions. The firm should have been more on the ball, from a supervisory standpoint, according to Stoneman.

“Raymond James did nothing to inject themselves into whether what was going on was suitable, despite numerous red flags,” Stoneman said.