Let’s consider an example.  You and your spouse have finally made it to the end of the work week.  It’s Friday night, and you’re both tired with only enough energy to take a moment for a personal inventory.  You have made it through the financial tsunami.  Check.  You kept your jobs and the house.  Check.  You refinanced your home successfully about year ago with Big Bank.  Check.  You paid your bills timely.  Check.  Your investments are taking a beating, but surviving.  Check.  The kids have graduated from college and although struggling to make a living, they are doing well.  Check.  It is time for a glass of wine and some relaxation.

The phone rings.  Caller ID shows the number is from out of state.  You answer the phone, and Rick (the names have been changed to protect the guilty) is calling from (it seems) Big Bank, the institution that holds your mortgage and other accounts.  Rick is really with Big Bank Securities (although the word “securities” is a bit mumbled).  He is calling about your mortgage.  You put down the wine and for a brief moment you and your spouse are thinking someone forgot to pay the mortgage.  You take a breath and find out that Rick really wants to discuss all that he knows about you and your mortgage.  Rick says that he has reviewed your mortgage and you can do so much better. He says not to worry because he can help you refinance at a lower interest rate without any out of pocket costs to you.  Rick is your hero.

All Rick needs is a full review of your financial situation in order to assist in the mortgage refinancing.  He also suggests that he can provide other financial services and wants to be your personal chief financial officer – he wants to work with you.

Rick does not mention the real purpose behind offering to refinance your mortgage is to gain access to your financial information to sell you products and services.  You see, Rick has a CSNA designation behind his name.  That gives you comfort.  But what is CSNA?  It is Certified Special Needs Advisor, and it suggests years of specialized study and grueling testing to earn a designation as someone who can assist with financial arrangements for a child or grandchild with some form of disability.  Actually, it is a three day program provided by an organization.

Rick tells you he will call back to get all the information.  For a moment you are thinking all is good.  Your spouse, however, is not so trusting.  Your spouse suggests checking FINRA before any information is provided to Rick.  FINRA is the organization in charge of supervising persons in the securities business and enforcing securities laws along with the SEC.   You simply go to www.FINRA.org/investors/ToolsCalculator/BrokerCheck/ and follow the directions to type in the name of the person like Rick from Big Bank Securities.

A few minutes later you both stare at the computer screen.  You double check and sure enough there is Rick with his education, securities exam results, and a section on complaints.  Rick just went through bankruptcy.  He has two customer complaints that were settled, one for $5,000 and the other for $50,000.  Do you really want Rick to be your personal chief financial officer?

What you really experienced is Wall Street’s desperation to find new opportunities for the sale of products and services even in today’s highly regulated environment.  Wall Street and the big banks are farming Main Street for any available pennies, nickels or dimes these days.  The perfect entree these days is to entice you with refinancing.  Rick’s Big Bank owns or controls a mortgage company.  Rick has access to your mortgage information so he knows you must have money because of your big mortgage.  He and Big Bank use the mortgage refinancing as a sort of loss leader for enticement.  They hide the fees in the refinancing.  What Rick and Big Bank Securities want is access to all your financial investments based on the information provided as part of the refinancing.  Rick then wants to sell you whatever he can.  What’s wrong with all of this?

Your financial data is supposed to be private and protected by the bank and its affiliates.  But it is really being used by affiliates to farm for investors.  The person calling you is from some other state and not the local branch of the bank.  Rick calls himself your chief financial officer, but how can Rick assist you when he has customer complaints and bankruptcy within one year?  He cannot maintain his own finances, so why should you trust him with your finances?

Now before we end this discussion, let’s go back to the designation Rick had of CSNA.  Just because an agent or broker has alphabet soup behind his or her name does not mean much, all by itself.  Many special designations are legitimate and well earned. But some may be acquired through online programs or a three day conference.  They may be useful tools in qualifying an advisor, but they are not enough.  Check through FINRA anyone who wishes to be your advisor, and think before you invest – Wall Street is actively looking for Main Street customers like you.  Make sure that anyone you hire is working in your best interests.

The post Financial Alphabet Soup is Really Not That Filling appeared first on Car Dealer Lawyers & Insurance Fraud Attorneys | Charapp & Weiss, LLP.

On June 7, 2012, the FTC announced that it had agreed on terms of a consent order with a Georgia Toyota dealer stemming from the dealer’s failure to maintain adequate control of its customer information as required by the FTC Safeguards Rule.  The FTC charged that the dealer had violated its Safeguards obligations by having peer-to-peer (P2P) software onto its computer system. The effect of this, the FTC charged, was to open up much of the dealer’s computer data, including non-public personal information of consumers with whom the dealer had done business, to others on the file sharing network. The FTC charged that this violated the Safeguards Rule’s requirement to have in place protections against open availability of private customer information and that it was contrary to the privacy notice given by the dealer to customers which assured that it had such protections in place.

The consent order requires the dealer to follow specific compliance procedures for twenty years. Not only must the dealer put the revised Safeguards procedures in place, train its employees about them, and regularly monitor compliance, it must retain an outside certified expert to do an initial assessment and a follow up assessment every two years to be sure that the dealer’s process is being followed. Like all FTC consent orders, it is backed up by the FTC’s power to level civil penalties for violations.

The FTC consent order shows one important reason why dealers must protect non-public customer information – the law requires it. However, there is an equally compelling reason to do so – customer data is a valuable asset of your business. Your customer list is part of the six or seven figure goodwill value of your franchised dealership.

What lesson does this consent order provide to a dealer? Clearly, failing to protect the security of your computer data is a serious problem, but there is a broader lesson. The FTC Safeguards Rule requires that a motor vehicle dealer have in place a plan for safeguarding non-public personal information of its customers. That rule went into effect in 2003, and every dealer should have a plan in place. However, adopting a plan nearly a decade ago is not enough. When was the last time you evaluated the effectiveness of your plan?

The FTC Safeguards Rule requires that, from time to time, each business must evaluate its Safeguards plan and its compliance with it.

A dealer’s Safeguards system is only as good as its ability to respond to the latest threat. Whether it is P2P software, hacker threats, or simply lack of physical security for access to the computer or to hard files in the dealership, new threats can arise daily. That is why the FTC Safeguards Rule requires that a business conduct regular audits to determine the effectiveness of its policy and procedures. From time to time, a dealer must look at its Safeguards plan and the soundness of the plan is protecting against threats, what incidents may have occurred that require changes, what general dangers have been identified by others in the industry, what experiences dealership personnel have had that suggest amendment to the plan or procedures are necessary, or other problems.

Hopefully, all dealers have adopted a Safeguards compliance plan. But a dealer who does not regularly evaluate and revise its plan and procedures is not effectively safeguarding its customer data and its business. At least once per year, the dealer’s Safeguard’s coordinator should examine and test the effectiveness of the dealer’s Safeguards plan. And any review should be done immediately if there is an incident suggesting a flaw in the plan or in implementation of the plan.

*Michael G. Charapp is a partner of the law firm of Charapp and Weiss, LLP who has over three decades of experience in representing car dealers and dealer associations.  This article is for educational purposes, and it is not to be considered legal advice. Feel free to contact Charapp and Weiss at www.cwattorneys.com or at 703-564-0220 if you have questions.

The post FTC Looking at Dealers for Safeguards Rule Compliance appeared first on Car Dealer Lawyers & Insurance Fraud Attorneys | Charapp & Weiss, LLP.

Have you wondered why industry publications are writing with increasing frequency about the expected demise of finance “markup”?  The answer is simple – proponents of dealer flat fees are working to sell the concept that “markups” are evil to regulators like the federal Consumer Financial Protection Bureau and the Federal Trade Commission with the hope that they will take action.  So what effect would a flat fee requirement have? Like any mandated change in the way an entire industry operates, it is hard to predict the impact clearly. But that is the problem.  No one knows the ultimate outcome, and bad results with real damage to the car business are likely.

To begin, “markup” is actually an incorrect and derogatory label based on the false assumption that the wholesale rates available to dealers because of their relationships with finance sources are available to consumers without the work of dealer personnel. We are really discussing dealer reserve, which is a phrase that derives from the early practice of finance sources to deposit dealer profit on financing into an account to be released as loans were paid off. Today’s payments to dealers on financing are simply advances against those reserve accounts.

So what are the risks from elimination of the reserve system?

• The present system incentivizes F&I representatives to fight for the lowest wholesale rate qualification for a customer so that the quoted dealer rate will be more favorable. A flat fee is just that – it is a fixed amount paid regardless of the rate paid by the customer, and it may reduce the incentive to fight for the lowest wholesale rate leading to higher finance rates with a negative impact on sales.

• Reduced incentives to work to qualify a customer for financing could actually make it harder for credit-challenged buyers to purchase a car.  That negatively affects not only those buyers, but dealers, manufacturers, and finance sources.

• The case against “markup” is built on the false premise that dealers act like home loan brokers who bear much of the blame for the recent financial meltdown. But a home loan broker works to sell the loan itself.  Once that loan is assigned to a lender, the broker walks away with no further responsibilities. Dealers sell cars and trucks, and they offer financing to facilitate those sales. Dealers are accountable for how they sell and finance vehicles for years after the transactions, so they are nothing like home loan brokers. Ironically, however, flat fees that may make it easier to sell car financing over the phone or online could lead to the type of finance brokering that was so detrimental to the mortgage market.

But what about discrimination and other problems consumer advocates have complained about for years?  Like other parades of horribles offered by dealer detractors, the problems of the reserve system are anecdotal and based on outdated information no longer accurate because of finance source limits and improved desking and selling practices.

If a change to the system is so potentially problematic, won’t finance providers and others defend the system?  Don’t expect that.

1. Finance sources can live with flat fees because they may make compliance with non-discrimination testing easier, and finance sources like the ability to set customer rates.
2. Manufacturers may seek to protect their captives who have the same interests as other finance sources.
3. Online companies, particularly portals, may see flat fees as making it easier to sell finance and ancillary products online, and that is to their benefit.

That leaves dealers themselves as the ones who must speak for the present system. Your national and state dealer associations are telling the story of why today’s finance system works. They need your support. If you are asked to appear at an event or you have the chance to speak to a legislator or to an opinion maker such as a reporter or a member of the editorial board member of your local paper to explain why the reserve system leads to lower rates for customers and increased sales to the benefit of dealers, manufacturers, and finance sources, take the opportunity.

Also, if called upon to show that your F&I reserve practices are legal, fair, and non-discriminatory, how would your dealership do?  A sound system includes a number of safeguards.

• A desking policy in which managers controlling deals understand the rates available to customers and quote available rates.

• A policy of target rates with upward and downward departures permitted for competitive and non-discriminatory purposes.

• A practice of selling the vehicle before referring the customer to F&I to reduce the temptation to manipulate rates to make a sale.

• Worksheets that have been reviewed by counsel and that accurately describe the terms of deals to your customers.

A government mandated change to the way an entire industry does business will have effects that no one can anticipate.  With the huge potential for negative fallout from the imposition of dealer flat fees, that is too big a chance to take with the entire retail car business at stake.

*Michael G. Charapp is a partner of the law firm of Charapp and Weiss, LLP who has over three decades of experience in representing car dealers and dealer associations.  This article is for educational purposes, and it is not to be considered legal advice. Feel free to contact Charapp and Weiss at www.cwattorneys.com or at 703-564-0220 if you have questions.

The post Make the Case Against Dealer Flat Fees appeared first on Car Dealer Lawyers & Insurance Fraud Attorneys | Charapp & Weiss, LLP.

Taxes! Everybody hates them. And as a professional who spent years in school earning your credentials, you have more reasons to hate them than most. You didn’t luck into a six figure salary. Your life was consumed getting there – interminable schooling fueled by endless loans, followed by years of jobs to learn your craft at meager wages. You worked hard to earn a salary to compensate for your hard work only to meet…the tax man, who wants more than a third of what you earn annually and a bigger chunk of your estate one day.

One day when you were complaining about what you pay the government, your cousin Tilly suggested that she knew a life insurance agent who could help you with your taxes. You met with him, you listened to his pitch about a deferred benefit plan, and you asked a lot of questions. He suggested a 412i plan, whatever that is. From the initial description it sounded as if you would have to fund retirement for your rotating staff which you weren’t interested in doing, but he told you that he could arrange an executive carve out. You really didn’t have the income to fund it initially but he convinced you to sell your investment real estate, declare your gain as ordinary income, and then buy the plan to offset that.

You’ve been hearing that the IRS is after “listed transactions” and you’re worried. Suddenly you’re having a tough time having cousin Tilly’s friend return your calls. The insurance company whose products fund your plan has taken your calls, but for the fourth time in as many months a representative has promised to get back to you. Honest he will!

You have gone to a new accountant and you learn that the plan was unsuited for you, it was formed improperly, and it’s going to cost you a lot more money than you have to pay the IRS not to mention the accountant and the actuary to sort it all out. Now you are worried that the problems may wipe out your retirement nest-egg and keep you working years longer than you intended.

Fortunately, there are ways to provide for your retirement that can afford you tax benefits while creating a solid retirement fund for your future so that you won’t have to be “that doctor”. However, getting there doesn’t necessarily start with cousin Tilly’s insurance agent friend or the “financial planner” you met on the golf course. If you want to avoid problems in your retirement plans, there are some things you should do.

1. Educate yourself. When you need a new car, do you go to your dry cleaner’s brother who is a car salesman to tell you what you want? Of course not. You choose some cars that interest you, you study them, and then you work with dealers to get the best car for you at the best deal. Why should your retirement planning be different? There are many types of financial advisors. There are also different types of retirement plans available and one is probably more suitable for your current financial capabilities and retirement needs. A great and easy tool is the IRS Retirement Plans Navigator. www.retirementplans.irs.gov.
2. Then find a financial advisor. There are lots of folks who want to sell you their retirement services: insurance agents, accountants, lawyers, stockbrokers and financial planners. Do research about them, search the internet, read about them, contact local professional associations, and use similar resources.
3. Interview potential advisors. There are a number of things you will want to find out, but one question is paramount – are you a fee-only advisor? A fee-only financial advisor is compensated solely by you the customer and not by some mega insurance company or broker for selling you their products. Advisors paid by insurance companies or brokers are not necessarily bad. But they do have a built-in conflict of interest you should recognize going into the relationship – they are only paid when they sell you something marketed by a company they write for. The National Association of Personal Financial Advisors provides an easy way to search for fee-only advisors. www.napfa.org.
4. When you choose an advisor, ask to see plan alternatives. Not all retirement plans are created equal. It’s nice to have options and supporting data to help you make a choice. For example, some retirement plans have significant and complicated administration requirements like IRS form 5500 filings and census testing that are additional costs to you. After you have met with your financial advisor and explained your financial capabilities and retirement needs and goals, ask your financial advisor for a comprehensive analysis of why one retirement plan is more suitable for you than some of the others (same goes for the funding products).
5. Consult with your accountant. There may be certain tax obligations and/or deductions that may make one retirement plan more or less attractive than the next. While a financial advisor can explain those to you as a part of any analysis, your accountant, who already knows your financial situation, may be able to give you deeper insight.
6. Consider the future. Consider estate planning to make sure any retirement plan you choose is meeting your estate planning goals as well.
7. Stay informed. Laws and taxes can and do change. Make sure that you are informed through your financial advisor and accountant of any changes that may affect your retirement plan.

So, you say, where was this sage advice when you were setting up your existing plan? That was a few years ago and you are having problems. Now what do you do?

• See your accountant, unless your accountant set up your plan in which case see a new accountant. Find out what the problems mean to you financially. What’s does the tax man want? Interest? Standard penalties? Listed transaction penalties? Wrap your arms around the tax consequences.
• Come up with a plan for addressing the problems. Must previous years’ tax returns be amended? What about interest and penalties? Interest will most likely be applied, but a waiver for penalties may be possible. If your staff should have been included in the plan but were not, do you have to fund it for them?
• If the IRS has already been to see you about your plan, you can’t wait. Hire a tax lawyer who can help you work your way through the issues in a way that you can hopefully afford.
• Can you afford the fix? Paying an accountant, possibly an actuary, and the IRS may be more than you can handle, even if you can come to terms with the IRS. If you are in a position where you cannot afford to fix your plan, then it is time to consider how to fund the solution. You may be in a place where you’ve got to come up with some funds you don’t have to solve your problems. Or perhaps you have paid out funds to solve your problems and you think that the people you hired to help you in retirement planning should be responsible because they didn’t to it the right way.
• You may have been the victim of retirement plan malpractice. See an attorney experienced in representing financial fraud victims and victims of pension plan malpractice. Be prepared to seek a recovery from those who should have been looking out for you. The professional who sold you the plan is the logical person to look to, but that person is likely to have limited resources and malpractice coverage that is insufficient to solve your problems. So who else do you look to? There’s the broker for whom the professional worked that is supposed to review and supervise the work of its agents. There is also the third party administrator for the plan whose obligations included making sure the plan was appropriately set up and administered. Finally, the insurance company sponsoring the plan or that issued the insurance policies and annuities that fund the plan has complex and comprehensive obligations under state laws and federal regulations to ensure compliance. Booking financial products produced by unacceptable practices is something that it should never do.

Be careful. Don’t be “that professional” whose retirement assets are wiped out because of cousin Tilly’s friend. But if you are “that professional”, then make sure you protect yourself. You put yourself in the hands of others to properly protect you and to make sure that the 412i plan, the 419 plan, or the VERA plan that they recommended to you were appropriate and properly set up. When they fail, they need to pay to solve the problems they caused.

*Brad Weiss and Kimberly MacCumbee are partners of the law firm of Charapp and Weiss, LLP who have substantial experience in handling insurance financial fraud issues in state and federal courts. This article is for educational purposes, and it is not to be considered legal advice. Feel free to contact Charapp and Weiss at www.cwattorneys.com or at 703-564-0220 if you have questions.

The post Avoiding the Tax Man’s Revenge appeared first on Car Dealer Lawyers & Insurance Fraud Attorneys | Charapp & Weiss, LLP.

You have a new client named Allen. Allen worked his whole life to build his small successful business that now has five employees. He saved every dollar he could, and he invested very conservatively in anticipation of retirement.

Allen comes to see you and tells you a story that is disquieting. A few years ago, he was at the country club and played a round of golf with a happy, friendly insurance agent named Bill. They quickly became friends. Over drinks, Allen complained to Bill about taxes and expressed his concern about his investments. Bill told him about a new and bullet-proof retirement plan for his business. Allen told Bill he could not afford to pay for his employees’ retirement, but Bill assured him that he could arrange an “executive carve out” for the defined benefit plan. Bill convinced Allen to implement a 412i plan that would include life insurance that gives Allen tax deductions now and when he retires. Bill sold him the plan and life insurance provided by Colossal Insurance, an A+ company. Allen paid big money and took big deductions. Life was great until recently. Allen is having trouble getting information from Bill, and he is worried about his investment.

You look further into the situation. It turns out that Allen was in a hurry since Bill convinced him he’d lose the opportunity if he did not move quickly. He told Bill to do all the paperwork (filled with errors and inaccuracies), and Allen does not remember signing anything. You call Bill and Colossal, and everyone claims to be too busy to answer questions, but they will get back to you. Promise! After some digging, you conclude that there are serious misrepresentations on the life insurance application (where Allen’s signature is clearly forged) that may give the insurance company grounds to avoid paying benefits. Even worse, it looks like Allen’s got an unqualified plan for which he was never entitled to take tax deductions and a present tax problem – a serious one. The economy has been tough, and he does not have nearly enough cash to resolve potential IRS issues. What do you do?

One alternative is to develop a plan to engage with the IRS and come to some agreement. But the idea that the IRS is ready to help Allen exists only in IRS propaganda. And contacting the IRS without all the facts and all the paperwork can open your new client to serious risks. No matter what, an agreement with the IRS will probably be more than Allen can afford. Why should Allen suffer the losses that were caused by those he trusted?

Another alternative, since the IRS remedies are likely to outstrip his ability to pay, is to wait until Allen can develop some resources to handle the IRS situation. But how will he do that?

The answer to each question is the same – those who were responsible should pay for what your client has suffered. Let’s go through the process of establishing a defined benefit plan, what can and sometimes does go wrong, to whom your client can look for compensation, and what relief is likely available.

Establishing a Defined Benefit Plan

It’s no secret why business owners look at adopting defined benefit plans. Social Security payments (assuming they will be available at a reasonable age for retirement) are hardly sufficient to maintain the lifestyle of a typical business owner. Substantial supplementation of annual income will be required. A defined benefit plan can provide the means of funding the supplementation by providing very substantial benefits, even for those retiring early. Because of the funding levels and because of funding sources such as annuities and life insurance, there is great security to a plan. And along the way, there are valuable tax benefits that make establishing a plan attractive.

The ongoing obligations, once a plan is established, are not impossible to meet, but there are critical steps. Each year the business must file a Form 5500 with a Schedule B. An enrolled actuary (an actuary who meets the qualifications of and has been approved by the Joint Board for the Employment of Actuaries) must determine the funding levels. The enrolled actuary must sign the Schedule B.

Defined benefit plans can be complex to set up. Consequently, a business considering such a step should utilize a team of individuals with knowledge and experience. At a minimum that team should include a CPA, an attorney with an understanding of ERISA, and a knowledgeable insurance agent. A qualified team aware of all the rules of the road can establish a solid plan to protect the business and the plan’s beneficiaries.

What Could Go Wrong?

The most serious problem is that many business owners seldom consult a qualified team. Often, the owner consults a board of experts (mostly buddies who have inventive suggestions to dodge taxes) or a financial planner who may not be fully conversant about the technical requirements of defined benefit plans. The next step will be a consultation with an insurance agent who is marketing a defined benefit plan as a means of selling insurance products. And that’s where the problems can start.

Whether someone is a candidate for a defined benefit plan and, if so, what kind of plan, requires a balance of science and an art. There are a number of alternatives that can include a 412i plan, a 419 plan, a VEBA plan, and others. There are Earned income levels of the business, the number of employees and their potential eligibility, the ability to contribute, and the correct mix of annuity/insurance policies must all be weighed. The complex paperwork to establish a plan must be properly and fully completed.

Unfortunately, while most insurance agents are honest and knowledgeable, sometimes a client may encounter one who is so intent on selling products that he is not the best person to weigh the various factors and to properly set up everything. Why? Because the incentive to sell life insurance is overwhelming. Commission levels on life insurance sales can often exceed 100% of the first year’s premium, and there can be substantial additional benefits as the years go on. The commissions are many times greater than they are for annuities that may be sold and that must be a part of certain defined benefit plans. So what happens? Shortcuts are taken. Selling life insurance is job 1. The niceties of appropriate plan design are secondary, and the obligations to complete essential paperwork are sometimes only done once the plan administrator or the insurance company underwriting the products starts screaming for the proper forms. The result? Too often it is a plan that is unqualified or even one that can be considered a listed transaction which has its own severe penalty implications.

What Are The Dangers?

There are substantial dangers from having an unqualified plan or a listed transaction. And for a time your new client may be able to run – but not hide. Your client must be constantly worried what will happen in the event of an IRS audit. The costs of participating in that audit, between your fees and those of an actuary who may be brought in to assist, may be immense. The end of the audit can be crushing for some businesspeople because it may involve interest and penalties on deductions improperly taken and even listed transaction penalties that can cause your client’s ultimate liability to skyrocket.

Your first goal will be to try to control the process. You want to contact the IRS before the IRS contacts your client. But that decision can be very costly. You will have to amend previous years’ taxes to fix improper deductions and probably negotiate interest and penalties. In addition, your client will have to spend money to get the plan right. Taking the steps to bring a faulty plan into compliance may well include significant past benefits and future qualification for employees who should have been included in the plan in the first place to make it legitimate.

Who Should Pay?

Who do you look to help defray the costs? The easy answer is the agent who sold your client the plan. However, your client is not looking at minor inconveniences. Instead, the combined costs of correction can often be hundreds of thousands of dollars, or even an obligation into the seven figures, to do everything necessary to solve the problems caused by people he trusted. Insurance agents are unlikely to have resources and malpractice coverage sufficient to solve your client’s issues.

The real answer is to look at those who should have been looking all along to make sure that the plan was established in full compliance with the law and to protect your client against financial fraud. The first of those is the broker for whom the agent worked. That broker has the statutory obligation to oversee and be responsible for the work of its agents to prevent pension plan malpractice. The next is the third party administrator for the plan. One of its primary obligations is to make sure the plan is appropriately administered. A plan that is defective when set up or not appropriately maintained is being administered negligently. The deepest pocket, often overlooked, is the insurance company sponsoring the plan or that issued the insurance policies and annuities that fund the plan. The insurance company has complex and comprehensive obligations under state laws and federal regulations to ensure compliance to ensure that its policy holders are not victims of retirement plan malpractice. Those obligations are supposed to be met by systems designed to ensure that the plans that are sold and the annuity and insurance policies that are underwritten comply with the law.

The Defense Strategy

Once a lawsuit is threatened, the likely defense strategy, especially from the insurance company, is predictable. The defendants will stonewall. Getting information from them prior to the lawsuit or even once it is filed, even though there are laws and regulations requiring that they provide documentation and information to insureds, will be difficult. Expect protests that they have done nothing wrong. Claims that they are the experts and that they could not possibly have done something the wrong way are par for the course. And finally threats to use massive resources to wear out your client will hardly be subtle.

So what do you do? Work with experienced lawyers who understand how to deal with those who have damaged your client. Experienced counsel will know what to do. They will understand the process of constructing the case. They will know what documents and materials to insist on in discovery to use in proving the case. Most importantly, experienced counsel know how to use the lofty sales puffery of insurance companies against them.

Sales puffery? By a major too-big-to-fail stalwart of the insurance industry? Absolutely! Insurance companies are noted for the lofty claims of how they exist solely for their policy holders. Listen to the advertising claims of any insurance company, and you will conclude that their insureds don’t need anyone else in life looking out for them. The insurers are there to help with policies that are solely for the insureds’ benefit. They are there to provide rock solid advice. They are there with their highly trained specialists who ensure every need is fulfilled. They are there to make sure that the insured spends the future at a palatial lakefront manse with a golden retriever gracefully jumping off the dock into the water. And all of this security is overseen by its omnipotent bulldog investigation unit to protect policyholders against fraud. Comforting isn’t it?

Don’t buy the hype. Experienced counsel will often be able to show that is often just a bunch of malarkey, and that insurance companies are sales machines that must keep the premiums flowing even if “shortcuts” must be taken. Their specialists are often ill-trained salespeople, and their investigative departments are used to protect the insurance companies and not insureds.

What Can be Recovered?

The potential recoveries can be substantial.

• Your client should be entitled to recoup his out of pocket expenses associated with hiring you and other professionals to deal with the IRS, including the costs involved in going through an audit.
• Your client should be able to recoup interest and penalties and even listed transaction penalties.
• Quite clearly, your client’s defined benefit plan will have to be brought into compliance. There will be associated costs that the client should be able to recover.
• It is likely that one of the costs of bringing the plan into compliance will be related to an employee census and funding or paying employees who were not appropriately originally provided for in the defective plan. Those costs should be an element of damages sought in any legal action.
• Depending on state law your client may be eligible for other compensatory damages for going through the ordeal.
• There may be statutory damages available for what your client has gone through if state law so provides.
• Most state laws will allow for punitive damages for a victim of a pattern of abuse, particularly where the insurance broker, TPA, and insurance company knew of or should have known of the wrongful activities of the agent.
• Finally, under appropriate state statutes, there may be rights to attorneys’ fees for the lawyer bringing the action and for expert witness fees for you and other professionals who provide valuable information for the jury considering the case.

It Can Be Done

Clients like Allen who come to you with a defective benefit plan must travel a rocky and dangerous road to arrive at a safe solution. But there are resources available to help fund that trip. Help your client not only get the plan into compliance and solve the issues with the IRS, but also help your client seek the means to fund the solution including compensation for what he has gone through and will go through. Consult experienced counsel who can help you protect your client’s rights.

*Brad Weiss and Kimberly MacCumbee are partners of the law firm of Charapp and Weiss, LLP who have substantial experience in handling insurance financial fraud issues in state and federal courts. This article is for educational purposes, and it is not to be considered legal advice. Feel free to contact Charapp and Weiss at www.cwattorneys.com or at 703-564-0220 if you have questions.

The post Defining Liability for a Faulty Defined Benefit Plan appeared first on Car Dealer Lawyers & Insurance Fraud Attorneys | Charapp & Weiss, LLP.

Annuities come in two general flavors. There is an immediate annuity, so named since there is an immediate payout based on a sum certain paid in, and there is a deferred annuity that promises a stream of payments over some future time period.

What are the differences? Here is an example of an immediate annuity using fictitious numbers: you agree to pay to the big insurance company $500,000 for the promise of a stream of income of $2,000 per month for the rest of your life. Here you are playing roulette against the insurance company’s army of actuaries who have already figured out your statistical likelihood of beating the clock. Compare that to a deferred annuity where you pay a lump sum or monthly payments, and in return the Insurance company guarantees you fixed sum per month starting in ten years for the rest of your life.

You assume that this has to be safe. The promise comes from a billion or trillion dollar insurance company that has survived the recent financial turmoil. And the rates take you back to your youth. The insurance company promises initial rates at 5 or 6%. What could go wrong?

Plenty. Slow down and take a good, hard look. Many adults 65 and older are being pushed into annuities. Agents and brokers like them because the commissions and bonus levels can be significant. Insurance companies love annuities because they lock up your money for a defined period of time giving the insurance company the opportunity to invest that money and make a higher rate of return. And since it is an annuity contract and not a whole life policy, many insurance companies do not even have to maintain reserves on those funds. This means that they can invest the entire amount in order to make big returns for themselves.

The initial interest rate or teaser rate is exactly what the name says. The insurance company promises an initial rate of 5-6 % for a limited time period. There are significant penalties and surrender charges if you need to withdraw the principal. Sometimes those penalties, combined with the cancellation or surrender charges, are far more than just the teaser rate interest and can actually go into the principal. Thereafter, rates may drop during the remainder of the contract to as low as .01 % for the life of the annuity which can be 15-20 years down the road.

Why is this a bad investment for the 65 and older crowd? Unless you have a substantial free cash flow, you are locking up your cash for a long time with close to a zero rate of return. Your hands are tied if you need the money. And in order for you to “win”, you have to outlive the standard actuary tables by a large margin.

So, if it appears to be too good to be true then perhaps it is too good to be true. While annuities can be appropriate and suitable investments under the right circumstances, you should carefully consider the investment. And you should think about working with a fee-based advisor so that you know that you are getting objective advice and not advice from someone driven by the commissions from selling you certain products.

One final word of caution. Many states require that someone selling you any investment, annuities included, perform suitability or needs analysis to determine if the investment suits your financial goals and needs. Make sure you are getting that from the person selling you the annuity.

The post Annuities for the Ages appeared first on Car Dealer Lawyers & Insurance Fraud Attorneys | Charapp & Weiss, LLP.

You don’t see the big deal if you dip into the plan to “borrow” informally from it. And you can skip a mandated deposit this year… or even all of them. The employees may complain, but so what? If you can’t pay them back, they can just get in line with your other creditors.

Well here’s what you need to worry about. Your liability to your employees may not just be another judgment that you won’t pay. A pension plan is governed by a complicated federal statute called ERISA, along with a myriad of state laws. The money contributed to the pension plan belongs to the plan and to the employees. The trustee or administrator (that is you Mr. or Mrs. Business Owner) has a right to the portion of the money held for you by the plan if you withdraw it or borrow it in accordance with plan requirements, but you have no right to other employees’ money.

So what does it mean if you dip into the pension plan to help the cash flow of your business? In simplest terms, you are stealing the money that belongs to others. Taking money to be contributed to the pension plan or that is already in the plan is a federal crime.

“So what,” you may say. “Tearing the tag off a mattress is also a crime, but nobody gets prosecuted.” We hate to burst your bubble, but there are strict rules for funding and using plan funds. If you run afoul of those rules, you can anticipate that a disgruntled current or former employee will file a complaint with the Federal Department of Labor (DOL). It is easy, fast and costs that person nothing. The DOL under the Obama Administration has a mandate to find and root out pension plan dipping and fraud. The agency will and does prosecute. Regular business people facing a financial crunch have gone to federal prison for borrowing or taking just thousands of dollars.

If you are caught you can expect to be indicted in federal court. You will likely have to post a bond and undergo an audit. If you plead guilty or you are convicted, you will be sentenced to go to jail or spend time in home confinement with an ankle transmitter. You will be labeled a federal criminal, and you will derail the rest of your life.

And then the IRS may sink its teeth into you. You will be subject to IRS action because you probably did not declare as income and pay taxes on that borrowed money. That may lead to potential IRS criminal charges too.

You do not have to believe this blog. Just go to http://www.dol.gov/ebsa/newsroom/criminal/main.html, and you can see a laundry list of regular people indicted and convicted just in 2011.

The simple answer is that there is never a circumstance that you can refuse to fund the plan or borrow from the plan unless you have met very stringent legal requirements under very special circumstances. You must consult an expert if this is something that you are considering.

The post Pension Plan Dipping appeared first on Car Dealer Lawyers & Insurance Fraud Attorneys | Charapp & Weiss, LLP.

Banks are important components of our financial system. Banks are great places to store money and perhaps get a mortgage or a loan. There are many fine banking institutions. However, whenever you are solicited by a bank representative to purchase investment products, insurance and annuities, red flags should go up.

When it comes to investment advice, you need to know who you are dealing with. The bank may be a solid institution and may be too-big-to-fail, but your direct dealings will be with a representative at your branch or someone who may call. That is when you need to ask one simple question: “What are your qualifications?”

Many investors assume that when they are dealing with a too-big-to-fail bank that they will receive first-rate advice. However, think about it. Who are you are dealing with? Perhaps it is a trained bank professional. Perhaps it is a professional who has had training in selling financial services and providing financial advice. Or maybe it is the branch manager’s son-in-law who could not hold a fry cook position at the local fast food restaurant.

Banks have moved swiftly into selling customers investments and insurance products since the Gramm-Leach-Bliley Act broke down the barriers between banks, financial services companies, and insurance companies. Banks have pursued these new avenues of revenue with a vengeance.

Bank customers are great prospects to buy other products. A depositor or a loan-holder is already a customer. The bank representative knows how much cash the customer has in his or her account. Think about it. The last time you deposited a large check, did the teller suggest that you may want to talk to someone in the bank about investing that cash? That teller can see and scan your accounts while depositing that large check. The kind branch manager or someone else at the bank instantly knows a lot about your financial circumstances. Customers assume that the bank is a secure location, and everything it does is regulated. It has to be safe and sound, customers assume.

You need to ask questions and get information before you decide to rely on a bank representative. The recommendation of investment products like annuities requires sound analysis and advice. What does the person at the bank know about annuities? Maybe he or she has been trained. Or maybe the representative is only looking at the commission on an annuity with a teaser rate of 6% that quickly drops to under 1% after the introductory period.

You should investigate and question the person at the bank the same way you would a person knocking at your front door to sell you a product. Ask for information about the person’s education and investment experience. If the person is selling securities, then he or she has to be licensed and registered. You can log onto www.finra.org, type in the person’s name, and you can see if there are any reported complaints against that person. The FINRA check will also show you that person’s employment history and licensing tests. You may also be able to check with your state insurance commission online. You should and must know the person you are dealing with. You may trust your bank, but trust and verify is a better piece of advice when dealing with your and your family’s financial security.

The post What Are Your Qualifications? appeared first on Car Dealer Lawyers & Insurance Fraud Attorneys | Charapp & Weiss, LLP.

We all know about the untimely death of Michael Jackson. According to news reports, an insurance company has refused to pay a policy for a large amount because the insurer now claims that Michael Jackson allegedly lied on his insurance application. His estate stands to lose significant benefits if the carrier can prove that at the time he completed an application Mr. Jackson knowingly provided false information.

In another case, a landlord filed an insurance application with misstatements. An apartment fire killed a tenant, and a massive lawsuit against the landlord resulted. The insurance carrier asserted that the application was a fraud and refused to provide the contracted coverage.

Accurate applications matter today more than ever. There was a time that a mistake could be overlooked. That is not true in today’s economy.

When you fill out an application, there is usually a verification just above your signature that all the information is truthful, complete and accurate. It provides that you represent these things under oath. It will also likely provide that if there are misrepresentations or false information the application is void.

You buy financial services and insurance to protect your family, yourself and your assets. You pay your premiums. You expect that you have purchased safety and security. But if you have misstatements in your applications, you may not get what you paid for.

This brings us to unethical agents. They will sometimes fill out applications for applicants and tell them not to worry about the details. Sometimes an unethical agent will ask the applicant to sign the form in blank and he or she will complete it. Sometimes applicants will ask about disclosures they should make, only to be advised by the agent to change the answer or to not provide information.

A financial services company or an insurer that can prove a knowing and material misrepresentation in an application can refuse to provide benefits for which you contracted. If you think that you will defeat the refusal by claiming that you were told to make a misrepresentation by an agent, it may not be that easy. Certainly, a company is bound by the actions of its agents. But, it just may be your word against the agent’s. And it will be your application with your signature that will be at issue. This is a problem you should avoid.

Accurate completion of a financial services or insurance application is an important ingredient in your investment strategy. Why? The insurance company or the investment company needs accurate information to properly consider your application, to evaluate the risk, and to determine your proper level of investment risk tolerance.

A false, mistaken or fraudulent application is like a ticking time bomb. Financial services and insurance companies often try to impress you that they have sophisticated fraud detection units. They try to sell you services and products based on the fact that those armies of highly skilled investigators are for your protection. Don’t believe it. From time to time, some investor or policyholder may benefit from the work of the fraud busters, but fraud detection units really exist to protect the financial services or insurance company against fraud by their customers. And that means you if you have material misstatements or misrepresentations in an application.

You pay premiums or make investments for years. Then something happens and you need your benefits. The company will then send its investigators to search for information to prove that the application was false. That will be the basis to refuse benefits. The simple answer is to make sure that you accurately complete the forms, disclose information and never sign forms in blank – no matter what an agent tells you.

The post Why Applications Matter appeared first on Car Dealer Lawyers & Insurance Fraud Attorneys | Charapp & Weiss, LLP.

Here is a common situation: an elderly patron visits the bank and asks the branch manger what to do with a CD from ten years ago coming due. The manager says that the current CD rate is .07%, or maybe 1.2% if the money is tied up for ten years. But, says the manger, the bank’s investment guru has a new product called a structured CD. When the elderly customer inquires about it, he or she is given a single sheet of paper with different interest rates that the customer can choose and a term of 7 years or longer. And, of course, the manger says, this new piece of financial wizardry is FDIC insured.

The structured CD may be a CD in name, but it is really a fairly high risk wager. In exchange for holding the customer’s money for 7 years or more the financial institution offering the product will take that money and invest it in a small pool of stocks. They buy and sell puts and options to cover the bet. The customer is guaranteed a minimum return of zero to a very appealing return in the area of 11%. That is the catch.

There are a number of risks with structured CD offerings that make them unsuitable for elderly financial customers.

• If the stocks rise greatly, enhancing the return beyond that which the bank wishes to pay, the financial institution has a right to call the product early and pay the customer out. This removes the upside benefit to the customer.
• If the customer attempts to redeem early, the penalties are so significant that the redemption can cut into the principal. So the customer pays taxes on the interest each year whether it is paid or accrued.
• The full amount of the investment and interest are not fully FDIC protected (read the fine print).
• There is a high probability that the return will be closer to zero than the upper limit quoted.
• Gambling on a pool of stocks as an elderly financial customer is almost never suitable for that customer.
• The company offering the product has experts who have already designed the product so that the customer’s return is minimized.

There is no way that an elderly financial customer could ever know all the risks of such a product. The bank generally does not provide a needs analysis or a suitability analysis for the elderly customer. The money is tied up, and parts of it and the interest are at risk, as investments in complicated stock strategies.

The post Structured CD Offerings and Elderly Financial Customers appeared first on Car Dealer Lawyers & Insurance Fraud Attorneys | Charapp & Weiss, LLP.