SEC Charges Investment Adviser with Defrauding Clients in Connection with Annuity Sales
Litigation Release No. 25669 / March 17, 2023
Securities and Exchange Commission v. Cutter Financial Group LLC et al., Civil Action No. 1:23-cv-10589 (D. Mass. filed March 17, 2023)
The SEC today announced charges against Massachusetts-based investment adviser Jeffrey Cutter and his advisory firm, Cutter Financial Group LLC ("CFG"), for recommending that their advisory clients invest in insurance products that paid Cutter a substantial up-front commission without adequately disclosing Cutter's and CFG's financial incentive to sell the products. Cutter also made false statements in applications for the insurance products and made false statements to at least one client regarding his commission compensation.
The SEC's complaint alleges that since at least 2014, Cutter sold investment advisory clients certain insurance products, called fixed index annuities, without adequately disclosing Cutter's and CFG's financial incentive to recommend fixed index annuities over other investment options. As alleged, whereas Cutter received through CFG an annual asset-based advisory fee of approximately 1.5% to 2% on assets managed in a client's advisory account, Cutter received up-front commissions on annuity sales of approximately 7% of the annuity's total value. Cutter allegedly failed to disclose to clients the amount or up-front nature of the annuity commissions, or how the annuity commissions compared to the asset-based annual advisory fees he received on assets in advisory accounts, in violation of Cutter's and CFG's fiduciary duty. The complaint also alleges that Cutter recommended some clients surrender a fixed index annuity the client already owned, including fixed index annuities he sold the client previously, and use the funds to purchase a new fixed index annuity through Cutter, which generated a second up-front commission and sometimes caused clients to incur surrender charges, without adequately disclosing his and CFG's conflict of interest. According to the complaint, Cutter also misrepresented certain clients' financial circumstances in annuity applications to insurance companies to help ensure the applications would be approved by the insurance carrier and misrepresented to at least one client the percentage of commissions he would earn on the client's fixed index annuity purchases. Cutter and CFG also allegedly failed to disclose the receipt of over $148,000 of free marketing services from a field marketing organization that provided Cutter and CFG with annuity sales support.
The SEC's complaint, filed in federal court in Massachusetts, charges CFG with violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act") as well as Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. The complaint charges Jeffrey Cutter with violating Sections 206(1) and 206(2) of the Advisers Act and aiding and abetting CFG's violation of Section 206(4) and Rule 206(4)-7. The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and penalties against the defendants.
The SEC's case is being handled by Jennifer Cardello, Alicia Reed, William Donahue, Rory Alex, Susan Anderson, Amy Burkart, and Robert Baker of the SEC's Boston Regional Office. The SEC's examination that led to the investigation was conducted by Lynn Murphy and Paul Prata of the Boston Regional Office.