ERROLD F. MOODY JR.
March 6, 2006
Florida Department of Financial Services
Department of Insurance
200 East Gaines Street
Tallahassee, FL 32399
Florida Office of Financial RegulationDivision of Securities and Finance
200 East Gaines Street
Tallahassee, FL 32399
SEC Headquarters
100 F Street NE
Washington, DC 20549
Florida Department of Elder Affairs
4040 Esplanade Way
Tallahassee, FL 32399-7000
RE: Constance P. Smith and Cynthia M. Smith, individually and on behalf of various family trusts v. The Johnson Financial Group, Inc., Asset Management Securities Corp., James Albert Johnson, Jr. and James Michael Johnson (Johnson) NASD Case No. 03-02522
Gentlemen,
The following report is a synopsis of a case against Florida resident and insurance and securities licensee James Johnson, Certified Financial Planner (CFP), James Johnson Jr.; CFP, et al. It is my assertion that after formal review of this case, the various Departments and organizations will see fit to examine in detail the files of other clients at Johnson Financial because identical violations of suitability and the law have occurred throughout its activities for years. Such activities include the sale of variable annuities into IRAs, sale of unnecessary life insurance policies, flipping of policies with needless surrender charges, use of a variable life product for the elderly, inadequate planning budget where the life insurance premiums were bankrupting the client, and much, much more.
Be advised that I receive no remuneration for this work I am now presenting. It is being processed as part of an ethical duty to rid the system of planners who have violated basic planning procedures, integrity and fiduciary duty. Additionally, they have no business dealing with the elderly. This scenario is a travesty that must be stopped.
Overview of case
I was employed by the Smiths almost five years ago to address a purported fraud by James Johnson and James Johnson Jr., et al. A final report (enclosed) was prepared on January 2002 after almost a year of research and reflects a consistent breach of duty by Johnson et al towards an elderly couple for years and even more so after the death of Mrs. Smith's husband in 1999. Due to the Statute of Limitations, a truncated case was filed with the NASD by the law firm Ackerman, Link and Sartory of West Palm Beach, addressing activities of just the last few years of Johnson's involvement with the Smiths. It elicited a $300,000 settlement agreement by Johnson (remaining unpaid) just before the arbitration was to begin (December 2004).
Parts of the case however remain unresolved and were not addressed by Ackerman, Link and Sartory. Cindy Smith (daughter) had, prior to my employment, contacted the CFP Board of Standards and made a formal complaint against Johnson for various perceived infractions. The Board sent her a subsequent letter indicating that the matter had been "investigated" and supposedly resolved (though no specifics were identified). Months later, through subpoena of Johnson, we received a letter to him from the CFP Board (enclosed) that had officially "exonerated" him of any wrong doing. He was using that statement as major component of his defense. However the Board repeatedly refused to provide to the plaintiff Smith, under subpoena, any of the documentation demonstrating that it had reviewed anything at all. Finally, in mid 2004, after the settlement ‘agreement' and pursuant to my continuing demand for the material, the Board released its files. There had been no investigation. The Board had absolved Johnson of any wrongdoing without any review whatsoever by their Board of Professional Review or anyone else. There were no memos, no reports, no Emails, no phone calls, no evidence of any communications whatsoever with anyone or any entity- absolutely nothing. Therefore the exoneration was a farce and invalid on its face. Because of this obvious breach of fiduciary duty, I subsequently was able to get the Board to reopen the investigation. But after many months of waiting, not one call to any party, not one report made. Absolutely no further investigation was made by the Board at all. The refusal to pursue an obvious breach by Johnson is no longer indicative of just gross incompetency but a direct violation of the Board's mandated fiduciary standards and practices. No matter the breach, it is clear that the Board's involvement in this case is tainted, if not corrupted, and cannot be relied upon when presented as a defense by Johnson.
Johnson's second insupportable defense involves calculations that have no real life application to the Smiths. Here is the scenario: If one had $5,000,000 of assets, then the amount of value would increase over 10 years to $6,000,000 (rounded) at a 2% return and to $13,000,000 at a 10% return. With such supposed appreciation, various estate tax offset planning via life insurance is potentially viable. Unfortunately, while the computations are correct, the real life application is totally without merit. The Smith couple had $5,000,000 in 1991- but it never changed over 10+ years. Up until Mr. Smith's death in 1999- and supported by audit in 2001- the asset based remained at $5,000,000. Johnson indicates that the Smith's estate was between $10,000,000 and $12,000,000 in early 1997 (increasing to $20,000,000 by 2007) but did not/could not provide validation- nor has been able to subsequently. Therefore, in 1999, without any idea of the true value of their assets, Johnson now takes the existing policies in the Smith trust (over $3,000,000) and flips and increases them to a $5,000,000 face value to cover for estate tax on an asset base that he declares is substantial and growing rapidly. It should be clear that you do not increase the size of a policy for an obviously non growing asset- though anything is possible if you simply project unsubstantiated numbers. The existing policies in trust were already more than adequate. Further, the increase in the premiums were such that the payments would reduce the Smith's assets down to zero before the actuarial lifetime of the insured. The premiums were more than Mrs. Smith's income! He had previously stated in 1997 that they were living comfortably on income without depleting their current estate. He had no idea the validity of the statement since no budget or income flow was identified. He sold excessive policies that were without merit at all times.
Next is Johnson's failed defense for the sale of Cindy's two $2,000,000 policies: Her 1997 inheritance ($750,000) was projected to grow to huge sums over her lifetime ($2,300,000 in 10 years). The computations are correct- but once again the logic and real life applications are without merit. There was no budget; the premiums were greater than her income had ever been. Further, Cindy's daughter was going to college and this would take considerable funds. Johnson's neglect of basic planning- a personal budget- produced the sales of excessive policies. Pacific Life Insurance Company would not cover for $4,000,000 of life insurance as originally submitted by Johnson since it was "not willing to underwrite a future need of this magnitude". Outside of my report, you cannot ask for a much more independent validation of a planner gone awry. They did place $2,000,000 but Johnson had to go elsewhere for the other $2,000,000. The premiums would need to come from her parents since Cindy was unable to pay for them. But said annual payments of $66,000 only reduced Smith's estate even faster. The end result was that Mrs. Smith was paying premiums on her own $5,000,000 variable life policy; then had to pay gift taxes for the premium into her irrevocable trust; then had to gift the premium of $66,000 to Cindy; then had to pay the gift tax on that amount; lastly Cindy then had to file a gift tax report in order to put the $66,000 of premium for her own universal life policy inside her irrevocable trust. Anyone can manufacture numbers to support whatever they wish to sell- and therein is the problem. If you have not done either a formal budget or net worth, you can present any erroneous future value position. It is "easy" to document an enormous estate tax values well into the future. It is "easy" to sell a policy to cover such contingencies. But it makes no real life sense. The fallacy of unsubstantiated numbers is clearly represented by the Smith's situation. The report I completed documented the error of his plan. There was no plan.
An additional item that was not addressed in my initial report (I was still awaiting the subpoenaed material from the Board prior to the arbitration in December 2004) that is an absolute breach by Johnson- Johnson flipped the universal life policies into a variable life policy that was in an irrevocable trust. That is inconceivable. The purpose of a variable life policy is NOT for insurance but for the inside buildup of money. These policies are far more expensive than pure guaranteed insurance (no lapse policies). Estate taxes are to be paid from pure insurance- you use the leverage of the insurance rather than cash. A dollar of cash only pays a dollar of estate tax- an irresponsible focus in an irrevocable trust. The intent to the inside mutual fund buildup within a variable policy is to take the money OUT of the policy to be used for other purposes. The problem is how are you going to take money out of a variable life policy that is in an irrevocable trust? If the money is taken out (loans), there is an incidence of ownership that draws the entire insurance proceeds back INTO the estate for tax purposes. An expensive variable policy for a 77 year old put into an irrevocable trust where no one has a clue to asset allocation is beyond credulity. An internal cash buildup that would cause less insurance at a higher cost that was also not needed is completely irrational.
Yes, it is true that the Smiths never should have bought the policies, they should have been aware of their financial condition and more. But they are not sophisticated in finances- far from it. Further, they trusted Johnson and assumed he was running the proper numbers and knew what was best for them. The planning was inherently flawed primarily because it was non existent. Only during Mr. Smith's illness did Cindy realize their desperate financial condition and subsequently question Johnson's tactics.
A case was filed to the NASD which culminated in an incomplete settlement. Johnson stipulated a payment of $300,000 to Mrs. Smith but the payments were distributed over such a long period of time as to make the payments worth far less. The Smiths did not sign. Further, once the CFP Board defense was found to be false, Johnson refused to complete the negotiations. Mrs. Smith has subsequently been quite ill and under a doctor's care. Cindy Smith has fared little better. They do not have the physical strength nor the financial resolve to start all over again with another NASD arbitration. The NASD will not impose any restrictions unilaterally. The Smiths were informed six months ago that I would independently be pursing this issue. Johnson's attorney, Alan Lerner, was also informed that I would submitting a formal complaint to governmental officials.
So in addition to the flipping, surrender charges, costs beyond the ability of the Smiths to pay, we have excess gift taxes and a wrong policy that was NEVER acceptable in an irrevocable trust and even more so for an elderly client. No matter the attempt by Johnson to rationalize the sale of these policies- or other actions as identified- the attempt fails miserably. Johnson cajoled, impressed, etc., the Smiths into continuing policies and practices that violate not only fundamental planning concepts but also all common sense. Only because Cindy felt something was very wrong and contacted me for an independent analysis has this farcical scenario been identified.
I contend that most of his other clients have been faced with similar situations but have had no one capable of pursuing the issues knowledgeably. However, as stated in the initial premise, it is imperative that not only are his activities ceased, but state and federal agencies need to put out clear directives to all planners that this type of activity will never be condoned. There must be far more specific education and enforcement. But no matter the future adjustments, current planners and firms already accept the fiduciary responsibility to know what to do and to do it.
As such, this material is submitted in order to put a stop to what were unconscionable acts by Johnson- and what I believe is indicative of many other similar acts upon others who do not have the understanding of what was happening to them. The scenario of the CFP Board's fraudulent release of liability was presented in order to invalidate any attempt by Johnson to subsequently utilize the previous "exoneration" as a defense. And the fallacy of computing specious numbers that have no relevance to real life. I repeat, you do sell a policy that costs more than the income of the client. And for a non growing asset. Under any independent and knowledgeably review, Johnson's actions are unconscionable and blatantly wrong. They were physically, emotionally and financially devastating to the Smiths. Neither he nor anyone like him should be able to practice- at least to the elderly. The legal and system failed the Smiths. The system is responsible for correcting this debacle.
This formal complaint incorporates all the issues in my report plus the additional comment regarding the invalid use of a variable life policy inside an irrevocable trust. Such issues include the sale of variable annuities into IRAs in the mid 90's (when there was no insurance guarantee upon the death of the annuitant. It was just greed). They include the flipping of whole life policies into universal life policies into variable life policies for a widow who was over 75 years old. The flipping caused significant surrender charges. What is the most egregious was that the Mrs. Smith never had enough money to pay for the policies. Johnson never did any formal planning for Mr. And Mrs. Smith, nor for the widow Smith, nor for the daughter Cindy. Formal planning is not "nice" and "sophomoric" words meant to sway a sale of a product or a spurious procedure. It is intensive planning of all areas of and for the client. Such a plan must include a complete and specific budget and its current and future implications. A new plan is mandatory after Mr. Smith's death. There was none. The result of Johnson's ineptness was financial deterioration and emotional devastation.
In short, these are egregious actions by a Certified Financial Planner that never should have occurred. The CFP Board of Standards should have acknowledged what was obvious and revoked his designation. (See letters to Board attached). The Board's marketed position to protect consumers from illegal and irresponsible activities and/or to investigate same are a fraud and their exoneration should be given no value. The financial planning was inherently defective since Johnson had little interest in computing a mandatory budget at any time. You cannot address risk nor reward without concrete numbers regarding a client's income and out flow. The rationales presented by Johnson are totally flawed. The Smiths are incapable of proceeding further. Therefore, of my own volition, I have decided enough is enough. Johnson et al has gotten a free ride for years and now is the time to put a stop to these offensive activities.
Johnson et al is a securities agent- the activities identified in the report are clearly a violation of many securities laws- suitability most obvious. The switch of IRA assets into a variable annuity is unconscionable. Further, in the 90's, there were no "death"guarantees that could be used as a rationalization for the sales. It is my contention, after additional review and questioning of his activities, that this was a standard practice with other clients.
Johnson et al is an insurance licensee- the activities of the sale of unnecessary policies, flipping; sale beyond capability of purchase- the list is extensive. The licenses for Johnson Sr. and Jr. should be revoked.
The enclosed report and accompanying letters provide proof of the actionable claims against Johnson. He effectively admits to same for $300,000- and that is just for the abbreviated claims submitted to NASD. But my comments are beyond that- regulatory departments need to investigate Johnson et al fully for what I believe are acts that clearly breach the fiduciary duties to his other clients. The various Florida departments and the SEC must initiate an immediate investigation of the Johnson's activities going back to at least the mid 90's. Further, all departments need to step up reviews and prosecution not only for Johnson, but for a large segment of the planning firms that deal with the elderly. The Smiths were not an isolated case.
I am aware of the supposed liability of this action. But I have no personal, financial or business gain in this endeavor. This is an activity that has decimated an elderly client and that I am confident exists at various levels with Johnson's other clients.
I will testify as required.
Very Truly,
Errold F. Moody Jr.
cc: Senator Bill Nelson
716 Hart
Senate Office Building
Washington, DC 20510
Senator Mel Martinez
317 Hart
Senate Office Building
Washington, DC 20510