LPL Financial' s compliance troubles might not be over after all.

The nation's largest independent broker-dealer, which was beset with numerous regulatory issues before this year, appeared to have resolved most of them in 2016.

But LPL, which has been the subject of market speculation the past month about a possible sale, got unwelcome news when Massachusetts' top financial regulator, William Galvin, charged Roger Zullo, a Boston-based LPL investment adviser with fraudulently selling retirees unsuitable variable annuities.

Galvin charges that Zullo pocketed nearly $2 million in commissions from the products over three years.

'PAPER THIN' REVIEW PROCESS

“For years Roger S. Zullo, an LPL adviser, has defrauded his clients, lied to his supervisors, and fabricated client financial suitability profiles in order to enrich himself and LPL by selling scores of identical, illiquid and high-commission variable annuities,” the complaint charged.

The complaint described LPL's compliance review process for the sales as "paper-thin," adding that Zullo bypassed the review by fabricating client financial suitability information, such as age and liquid net worth.

"LPL rewarded Zullo’s fraudulent practices and suspicious sales patterns with the accolade of a place in LPL’s 'Chairman’s Club' for top annuity production,” the complaint said, “and actively disregarded and denied not only countless warning signs and red flags, but deliberate and specific supervisory attempts to escalate concerns with Zullo’s sales practices, as well as a written complaint made on behalf of a cognitively impaired senior citizen that affirmatively identified Zullo’s fraud.”

In a statement, LPL said: "We are reviewing the matter and hope to work with the Massachusetts Securities Division to reach a full resolution. We take our responsibility to supervise very seriously and are committed to serving our investors."

HEALTH CARE WORKERS TARGETED

Zullo's firm, Finn Zullo, brands itself as specializing in "Personal Retirement and Income Management." The firm's website says "Finn Zullo Financial advisors goal is to help you grow financially so you can live comfortably in retirement."

The Massachusetts complaint said Zullo sold annuities mostly to health care workers, including doctors and nurses, and began doing health care seminars in 1987.

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"LPL rewarded Zullo’s fraudulent practices and suspicious sales patterns" the Massachusetts complaint charges.

Nearly all of the $1.825 million in variable annuity commissions Zullo and LPL received came from one product, the Polaris Platinum III (B Shares) variable annuity, which carry a 7% commission, split 90% for Zullo and 10% for LPL.

Annuities are cited on Finn Zullo's website in an article about a "split annuity strategy," combining purchases of a fixed–period immediate annuity and a single premium tax-deferred annuity.

'UNABLE TO ACCESS MONEY FOR YEARS'

In many instances, clients had to pay surrender charges when Zullo persuaded them to switch to the Polaris Platinum annuity, the complaint charged. What's more, some sales left older clients without access to their money for years, according to the complaint.

(Image: Bloomberg News)
(Image: Bloomberg News)

Eleven Zullo clients are cited in the complaint, which warns that number could rise as officials determine how many others have been affected by the misconduct.

The complaint seeks to revoke Zullo’s registration as an investment adviser and broker-dealer in Massachusetts and permanently bar him from the securities business. It calls for LPL to retain an independent third-party investigator and compliance consultant to probe Zullo’s annuity sales and recommend improvements in LPL’s supervisory review process and client complaint resolution procedures.

Zullo and LPL would also be required to account for all losses attributable to the alleged wrongdoing and provide restitution to compensate investors for those losses.

ABDICATION OF OVERSIGHT RESPONSIBILITIES?

“Betrayal of the trust of investors, especially older investors, retirees and those in the health care industry, is unconscionable behavior on the part of an investment adviser, and will not be tolerated,” Secretary Galvin said. “And this office will not accept a company’s abdication of its oversight responsibilities while the commissions accumulate.”

Zullo did not respond to requests for a comment. David Freniere, listed as Zullo's counselor on the complaint said he was unable to comment. Freniere was head of litigation for LPL from 1992 to 2012.

LPL paid $36 million in regulatory charges in 2014, but compliance penalties were expected to end in 2016, Mark Casady, the firm's chief executive, told Wall Street analysts last year.

The firm boosted expenses last year as it overhauled its risk management system and hired compliance experts.

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Charles Paikert

Charles Paikert

Charles Paikert is a senior editor at Financial Planning. Follow him on Twitter at @paikert.