A jury partially ruled that a Massachusetts-based investment advisory firm (and its CEO) violated federal securities laws by not disclosing details about commissions from annuity products. However, the jury opted against finding the firm guilty of the most egregious fraud charges it faced.
The Securities and Exchange Commission originally filed charges against Cutter Financial Group (and founder Jeffrey Cutter) in March 2023, alleging that Cutter recommended clients invest in certain annuity products. However, the agency argued he didn’t disclose that his firm received “substantial, up-front commissions” from the insurance companies for each annuity sale.
According to the verdict form filed Wednesday, the jury found that Cutter Financial Group and Jeffrey Cutter violated Section 206(2) of the Advisers Act, which makes it illegal for advisors to “engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.” However, the jury found against the SEC in the other two violations for fraudulent content.
Nevertheless, the commission lauded the verdict reached after a seven-day trial and about five hours of deliberation; Enforcement Division Acting Director Samuel Waldon said the agency was “pleased” that the jury found the firm responsible for breaching fiduciary duties.
According to the original complaint, Cutter has been an IAR since 2005 and founded Cutter Financial Group in 2017 while marketing the practice through a radio program and podcast, a seminar at a local college and a church bulletin.
While Cutter invested some assets through an annuity he sold through his firm, he mainly partnered with third-party insurance providers, according to the complaint. For those assets, clients paid an annual asset-based fee to the firm totaling about 1.5% to 2% of their total assets.
According to the complaint, Cutter would get up-front commissions from the insurance companies as high as 8%. Cutter’s alleged scheme involved getting clients to “switch” annuity contracts, which would nab Cutter’s firm more up-front commissions.
The SEC accused Cutter and the firm of trolling for replacement annuities before meeting with clients so they could suggest changes in their annuities (even if those changes weren’t warranted).
According to the commission, Cutter didn’t tell clients about those commissions and how they compared to the annual advisory fees he received from advisory account assets. The commission also claimed Cutter misrepresented some clients’ financial situation on annuity applications to insurance to ensure their approval.
Cutter argued the jury didn’t find violations of applicable SEC rules about compliance procedures. It merely found that CFG was negligent in not disclosing the specific amounts of the commissions it received for some clients. The firm pledged to launch educational and compliance initiatives, including a campaign for clients to explain compensation structures.
“Today, the jury found what we have been saying for more than four years: that we did not intentionally or recklessly defraud any clients,” Cutter said. “These are claims that should never have been brought in the first place. It is very difficult for a small business to stand up to federal government regulators and prevail. But that’s what we did today.”
According to Benjamin Edwards, a professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas, the case was “a win” for the commission, as they established the defendants had violated the Advisers Act. But it did seem to him that the jury had split on whether they were acting “with fraudulent intent or negligently.”
“There may be implications for the kinds of penalties the SEC will be able to secure,” he said. “Knowing and intentional fraud would be a stronger finding for a bigger penalty.”