The Financial Industry Regulatory Authority (FINRA) has suspended Andrew J. Aragona, a former broker with Newbridge Securities Corp., from associating with any FINRA-registered firm in any capacity for one year for unsuitably recommending that an elderly customer switch variable annuity contracts.
Per a default decision entered May 2, Aragona was also fined $15,000, and ordered to disgorge the $123,500 he made in commissions from his unsuitable recommendations.
Aragona first registered with FINRA as a general securities representative in 1985. He joined Newbridge in July 2007 and remained there until March 2009, when he left voluntarily. After his departure, Newbridge was notified of an arbitration claim filed by a customer identified in the default decision only as E.P.
In July 2010, Newbridge filed paperwork disclosing an arbitration claim by E.P. that Aragona had recommended unsuitable variable annuity switches, according to the default decision.
Newbridge settled this arbitration claim for $55,000 in November 2011, according to FINRA public disclosure records.
Following an investigation, FINRA filed a disciplinary action, also in November 2011, alleging that Aragona recommended two contract switches that were not suitable for E.P., a woman in her late seventies, the decision said. E.P. had a primary investment objective of capital appreciation, a moderate risk tolerance, annual income of more than $100,000 and $500,000 in liquid assets.
Despite multiple notices, Aragona did not answer or otherwise respond to the FINRA's complaint. The hearing officer eventually granted the Department of Enforcement's motion for entry of a default decision.
According to the complaint, Aragona's actions violated conduct rules 2110 and 2310 of the National Association of Securities Dealers (NASD), a FINRA predecessor.
NASD Conduct Rule 2110 concerns standards of commercial and equitable principles of trade. NASD Conduct Rule 2310(a) requires brokers to have an adequate and reasonable basis to believe the transactions they are recommending are suitable for their customers based information supplied by the customers as to their other holdings as well their financial needs. Reasonableness is predicated on the potential risks, rewards and consequences of a given recommendation, the default decision said.
If a broker recommends replacing one variable annuity contract with another, the broker must consider whether the improvements and enhancements in the product are worth the surrender charges and commissions. Any recommendation to replace an existing variable annuity contract with a new contract that does not clearly improve the customer's position is unsuitable, the default decision said.
The recommendations Aragona made to E.P were unsuitable because the supposed benefits of the variable annuity switches were substantially outweighed by the costs she incurred, namely, the $130,000 in surrender fees and the $123,500 in commissions that went to Aragona, the default decision said.
Aragona recommended the two variable annuity switches between September 2007 and September 2008. Before he joined Newbridge, he had sold E.P. four variable annuities and shortly after he joined the firm he recommended the first switch: that E.P. consolidate all her annuities into one Lincoln National annuity, according to the complaint.
The Lincoln National annuity was supposedly better because it offered revocable annuitization, which allows the annuitant to specify payout terms and prevents beneficiaries from changing the terms after the annuitant dies. Aragona also maintained that the Lincoln National annuity was a more tax efficient means of inheritance.
E.P. paid about $1.2 million for the Lincoln National annuity and incurred roughly $69,000 in surrender fees as a result. Aragona made $67,500 in commissions, the complaint said.
In August 2008, less than a year after E.P. purchased the Lincoln National annuity, Aragona recommended that she switch the Lincoln annuity for a Nationwide Marketflex II annuity. Aragona said the Nationwide annuity was more flexible, an important trait in the volatile market conditions at the time. He also based his recommendation on the fact that the Nationwide annuity allowed investments in Rydex funds. These funds have no restrictions on trading frequency as well as no penalty for short holding periods, the complaint said.
The Nationwide annuity did not offer revocable annuitization, however, which was the reason Aragona had recommended the consolidation and switch to a Lincoln National annuity in the first place.
E.P. paid roughly $1 million for the Nationwide annuity and incurred about $61,000 in surrender fees, the complaint said. Aragona received $56,000 in commissions.
The complaint alleged that the benefits to E.P. of revocable annuitization and the ability to invest in Rydex funds were outweighed by her significant surrender and commission costs. Within a year, she paid about $130,000 in surrender fees and $123,500 in commissions to Aragona, which in total represented more than 10 percent of the value of her investments.
Because these costs markedly outweighed the benefits, the complaint said, the recommendations were unsuitable.
FINRA's hearing officer judged the alleged facts sufficient to establish that Aragona had failed to conduct an objective, quantitative analysis of the benefits of the recommended switches, the default decision said. Therefore, the hearing officer founds that Aragona made unsuitable recommendations in violation of NASD Conduct Rules 2310 and 2110.
If you have been the victim of securities fraud you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Firm, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.