U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. LR 17591 / June 27, 2002
Securities and Exchange Commission v. Gregory P. Waldon, No. CIV-02-1395 (E.D. California)
SEC CHARGES CALIFORNIA BROKER WITH FRAUD IN VARIABLE ANNUITY SALES
In only the second Securities and Exchange Commission action for fraudulent variable annuity switching, the SEC today announced the filing yesterday of civil fraud charges against Gregory P. Waldon of Redding, California. The suit alleges that Waldon defrauded scores of retired customers by recommending that they replace existing investments in variable annuities with new investments in similar variable annuities, knowing that the switches would be harmful to his customers but would enable him to receive significant commissions. The complaint alleges that Waldon recommended approximately 57 such switches between January 1998 and November 2001. Waldon's customers either received no economic benefit or lost money in the switch transactions and together incurred more than $200,000 in needless transaction costs, while Waldon received approximately $275,000 in commissions for the unsuitable switches.
Variable annuities are considered long-term investments that offer customers various investment options typically similar to mutual funds; however, variable annuities are taxed differently, have insurance-related features, and charge different costs. Waldon is a former registered representative of Commission-registered broker-dealers through which he sold variable annuities, including FASCO International, Inc., formerly of Chico, California. Most of Waldon's customers live in Northern California or Oregon.
According to the filings, Waldon further defrauded his customers by misrepresenting the effects or the benefits of switching, and by failing to disclose to certain customers the costs and risks of switching. The complaint alleges that Waldon told certain customers that they needed to switch to a new variable annuity from their original variable annuity in order to stem investment losses caused by declines in the stock market during 2000 and 2001, even though switching did not halt their losses and the customers could have achieved their objective, without incurring switching costs, by simply electing another investment option within their original variable annuity. Waldon was aware that most of his customers did not have significant investment experience, particularly regarding variable annuities, and relied upon him when making the decision to switch.
In the civil complaint filed in United States District Court for the Eastern District of California, in Sacramento, the Commission charges Waldon with securities fraud based upon the approximately 57 variable annuity switches, and based upon material misrepresentations and omissions regarding costs, benefits and risks of switching. The complaint seeks an injunction against Waldon prohibiting future violations of the antifraud provisions of the securities laws (Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder), disgorgement of ill-gotten gains, plus interest, and a civil monetary penalty.
Today the Commission also instituted and simultaneously settled public administrative proceedings yesterday against Donna N. Morehead, who was Waldon's supervisor between September 1999 and May 2001 at FASCO International, Inc. In the Matter of Donna N. Morehead, Exchange Act Rel. No. 46121. The Commission's Order Instituting Proceedings found that Morehead failed reasonably to supervise Waldon, as she did not investigate adequately red flags raised by certain switches when she reviewed the transactions for FASCO. Morehead consented to the Order, without admitting or denying the findings. The Commission's Order bars Morehead from association in a supervisory capacity with any broker-dealer, with the right to reapply for such association after one year, and imposes a $10,000 civil penalty.