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Regulation and Compliance > Litigation

Advisor Charged With Defrauding Clients in Annuity Switching Scheme

By Jeff Berman

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The Securities and Exchange Commission charged an advisor in Falmouth, Massachusetts, and his firm with defrauding clients as part of an annuity replacement scheme that caused the clients to incur a total of $640,000 in surrender charges between 2018 and 2022.

In a complaint filed Friday in U.S. District Court for the District of Massachusetts, the SEC alleged Jeffrey Cutter, 55, and his firm, Cutter Financial Group, recommended that their advisory clients invest in fixed indexed annuities that paid Cutter a significant upfront commission without adequately disclosing his and CFG’s financial incentive to sell those products.

Cutter has been registered with the SEC as an advisor for the past 16 years, according to his report on the regulator’s website. During that time, he was an advisor with four firms, starting with ING Financial Partners in 2005. He was registered an advisor for his own firm, CFG, since 2017.

The SEC’s complaint alleged that, since at least 2014, Cutter sold his clients certain fixed indexed annuities, without adequately disclosing his and CFG’s financial incentive to recommend fixed indexed annuities over other investment options.

“Time after time, Cutter switched clients out of annuity contracts he had previously sold them into new annuity contracts without adequately disclosing his financial incentive to recommend these switches, including the substantial, up-front commissions he received from the insurance company and other third parties,” according to the complaint.

The complaint also alleged that Cutter recommended some clients surrender a fixed indexed annuity the client already owned, including fixed indexed annuities he sold the client previously, and use the funds to buy a new fixed indexed annuity through Cutter, generating a second upfront commission and sometimes causing clients to incur surrender charges, without adequately disclosing his and CFG’s conflict of interest.

“To perpetrate his scheme, Cutter made false statements to the insurance companies to effectuate the switches and generate a new round of commissions for himself,” the complaint alleged. “In doing so, Cutter and CFG breached their fiduciary duties to never place their own interest ahead of their clients’ interests, to disclose all material conflicts of interest, and to obtain clients’ informed consent to those conflicts before proceeding.”

Cutter received through CFG an annual asset-based advisory fee of about 1.5% to 2% on assets managed in a client’s advisory account but he received upfront commissions on annuity sales of about 7% of the annuity’s total value, according to the complaint.

The defendants also “failed to disclose the free marketing services and payments of more than $1.1 million that Cutter received from marketing firms in exchange for peddling annuities to his clients,” according to the complaint.

“In doing so, they abrogated their fiduciary duty of loyalty to make full and frank disclosure of all conflicts of interest to their advisory clients and to obtain their clients’ informed consent to these conflicts of interest,” the SEC alleged.

The complaint charged CFG with violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, as well as Section 206(4) of the Advisers Act and Rule 206(4)-7. Cutter was charged 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 in addition to prejudgment interest, and penalties against Cutter and CFG.

(Photo: Diego M. Radzinschi/ALM)

Jeff Berman

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